Privatization in Germany: The Case of Lufthansa
by
Mark R. Hutchinson
B.S., Political Science
Boston College, 1992
Submitted to the Department of Political Science in Partial
Fulfillment cl the Requirements for the Degree of
MASTER OF SCIENCE
in Political Science
at the
Massachusetts Institute of Technology
June 1995
1995 Mark R. Hutchinson
All rights reserved
The author hereby grants to MIT permission to reproduce and to
distribute publicly paper and electronic copies of this thesis
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Department of Political Vieke, M-ay 10, 1995
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Richard M. Locke
Associate Professor of Industrial Relations and Political Science
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Barry
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2
Privatization in Germany: The Case of Lufthansa
by
Mark R. Hutchinson
Submitted to the Department of Political Science
on May 10, 1995 in partial fulfillment of the requirements for
the Degree of Master of Science in Political Science
ABSTRACT
Privatization has been adopted by both advanced anddeveloping states for a
range of reasons. Principle theories of privatization focus on the role of
economic heory, budgetary needs, ideology, party political motives to divide
social democratic movements, and internationalization as the driving force
behind privatization. The case of the privatization of Lufthansa is examined
to test these various theories to determine which forces are most important
in Germany. The case study, based on primary and secondary sources, as well
as extensive interviews with corporate and union officials, indicates that a
combination of budgetary crisis (due to the costs of unification) and increasing
competition in the global airline industry led to the privatization of
Lufthansa. Massive budgetary shortfalls created a "crisis space" within which
German leaders could more forcefully pursue privatization as a policy option.
At the same time, developments at Lufthansa and in the airline industry
generally made the carrier an attractive candidate for divestment.
Prior to privatization, Lufthansa embarked onan ambitious and extensive
rationalization and restructuring campaign, designed to increase
competitiveness and, by extension, international investor interest. These
efforts represent a shift in the balance of power at Lufthansa in favor of
management, but it is too early to tell whether the traditional "German
model," as it exists at Lufthansa, is in transition. While the substance of the
management-labor bargain is changing, the structures within which this
bargain is negotiated are not. Increasing international pressure, however,
continues to threaten the structures themselves, particularly with respect to
11.
out-staffing" of flight crews on international flights operated in conjunction
with Lufthansa's new strategic alliance partners, and within the context of a
new, decentralized corporate structure which threatens to localize wage
bargaining and offer more room for managerial experimentation.
Thesis Supervisor: Dr. Richard M. Locke
Title: Associate Professor of Industrial Relations and Political Science
3
Acknowledgments
This project received encouragement and helpful commentary from
many quarters. First and foremost, I would like to thank my advisor,
Professor Richard Locke, and Professor J Nicholas Ziegler for their patience
and support. Field research for this study was conducted in Germany with
funds received from the Short Term Opportunity Grant program at the
Center for European Studies, Harvard University, to which I am most
grateful. Many scholars and officials were very kind to talk with me during
my stay in Germany, I would like to extend a special thanks to Professor Josef
Esser, the scholars at the Max Planck Institut in K61n, and officials at
Lufthansa, OTV, and DAG. Finally, I thank my family and friends, especially
Ben Valentino, Gunnar Trumbull and Chris Afendulis, whose advice and
support were helpful beyond measure. While this work reflects their input,
the usual disclaimer applies.
4
Chapter 1: Introduction - Theories of Privatization
Beginning, symbolically, with the victory of the Conservative Party in
Britain under Margaret Thatcher in 1979, the size of the public sector in
almost all countries contracted or remained the same-1 This development
was unique in the history of the global public sector, as it has, with minor
exceptions, expanded in virtually every previous era. The apparent victory of
monetarism, illustrated by the reversal of French monetary and fiscal policy
in 1983, not only brought about apparent convergence in monetary policy on
tight control over inflation, but also facilitated a major reevaluation on the
proper boundary between state and society. Just twenty years after the
perceived triumph of the mixed economy and technocratic macro-economic
management in the 1960s,3both advanced and developing states appeared to
embrace privatization as a means of reducing the state's role in the economy,
increasing the efficiency of formerly public enterprises, and achieving various
other economic and political policy goals. Revenue figures alone represent
an incomplete measure of this shift, but are nonetheless illustrative.
Between 1985 and 1993, approximately 328 billion had been raised by 100
governments through sales of public enterprises to private actors, while
proposed sales will raise $150 billion by 1998.4 By the beginning of the 1990s,
privatization was truly a global phenomenon, adopted by advanced,
developing and post-communist states in a sweeping affirmation of the
market as the most efficient and distributionally acceptable mechanism
through
0 which to provide even traditionally "public" goods and services.5
lLeroy P. Jones, Pankaj Tandon and Ingo Vogelsang, Selling Public Enterprises:A Cost-Benefit
Methodology (Cambridge, MA: MIT Fress, 1990).
2jeffrey Sachs and Charles Wyplosz, "The Econon-dcConsequences of President Mitterrand," in
Economic Policy, 2 (April 1986): 261-322.
3Two prominent works describing this view are Andrew Shonfield, Modern Capitalism(New
York: Oxford, UP, 1965), and John Kenneth Galbraith, The Nw Industrial State (Boston:
Houghton
Mifflin, 1967).
4Vincent Wright, "Industrial Privatization in Western Europe: Pressures, Problems and
Paradoxes," in Vincent Wright, ed., Privatization in Western Europe: Pressiires,Problems and
Paradoxes(London: Pinter Publishers, 1994).
5Fo a survey of privatization in advanced OECD states, see Barrie Stevens, "Prospects for
Privatisation in OECD Countries," National Westminster Bank Quarterly Review (August
1992) 222; for a treatment of privatization in developing states, particularly Latin America,
see William P. Glade, ed., State Shrinking: A Comparative Inquiry into Privatization (Austin,
TX: Institute of Latin American Studies, 1986);for a discussion of privatization efforts in
5
The pace and scope of privatization, however, varied significantly
among states and regions. For example, while Great Britain, France and New
Zealand implemented extensive privatization programs, states in La-dn
America and Africa adopted more cautious ones, some actually rejecting
privatization as an acceptable or viable policy.6 A broad range of countries fall
between these poles, including Germany, which was committed to
privatization in principal, while posting comparatively modest results.7
These differences between states can be traced to either different starting
points, in terms of the initial size of the public sector; institutional
differences, such as the lack of mature equity markets; or to differences in
policy goals. This study focuses on the case of the privatization of Lufthansa
to test various theories of privatization, and to illuminate the distinctive
institutional features and implications of privatization in Germany.
LA Introduction: What is Privatization?
Before launching into a discussion of privatization in Germany, it is
essential to precisely define the concept of "privatization." The term is
deceptively simple, and has been used to describe a broad range of
government policies designed to reduce the scope of government in the
economy. The MIT Dictionary of Modern Economics 1994) defines
privatization as:
"[t]he policy of converting public ownership of an asset to
private ownership or of permitting the performance of a certain
activity, hitherto carried out by the department of a public
organization, by a private sector business."(345)
Eastern Europe, see Ferdinando Targetti, ed. Pivatization in Europe: West and East
Experiences (Brookfield, VT: Dartmouth
Publishing Co., 1992).
6Stevens, "Prospects for Privatisation in OECD Countries," 222. See Table 24 for a comparison
of revenues among selected OECD countries from privatization.
7josef Esser labeled Germany's privatization campaign "symbolic privatization," due to this
discrepancy between the stated intentions and actual results of privatization. See Josef Esser,
"'Symbolic Privatisation': The Politics of Privatisation in West Germany," West Eropean
Politics 11:4 (October 1988): 61-73; updated in "Germany: Symbolic Privatizations
in a Social
Market Economy," in Vincent Wright, ed. Pivatization in Western Erope: Pressures, Probleins
and Paradoxes(London: Pinter, 1994):105-121.
6
While this definition encompasses two main variants of privatization -- sale
and contracting out -- many other policies have also been subsumed under
the label "privatization," such as joint ventures, recapitalizations, and the
sale of minority stakes or subsidiaries of public enterprises.8 Each of these
forms.of privatization necessitate different analyses. For example, the
contracting out oF services, such as waste disposal, implicates theories of
incomplete contracting and information asymmetries. Conversely, an initial
public offering of shares in a public enterprise implicates debates surrounding
the efficiency of capital markets as an adequate disciplinarian for managerial
behavior. This study will focus on the more traditional form of privatization,
the total or partia19 sale of government enterprises to private actors, or what
Vickers and Wright 1988) term "industrial privatization."
The choice to focus on industrial privatization reflects two primary
considerations. First, industrial privatization represents the most visible and
enduring example of redrawing the state-society boundary. Floatations of
huge public enterprises, such as Lufthansa or British Telecom, attract both
domestic and international attention due to their implications for potential
investors, current employees, and incumbent management. They are
enduring because the costs associated with renationalization, both political
and economic, are quite substantial. It is unclear whether asset sales are
irreversible, or whether the privatization boom is simply another phase of
Hirschman's "involvement cycle," whereby popular support for the public
sector ebbs and flows in historical patterns.10 There is no doubt, however,
that privatization has facilitated the growth of entirely new sets of interests
which are likely to strenuously oppose any plans to discontinue or reverse
8John Vickers and Vincent Wright, "The Politics of Industrial Privatisation in Western Europe:
An Overview," West EuropeanPolitics 11:4 (October 1988):1-30. There are numerous methods
of privatization, ranging from initial public offerings of company stock, share giveaways to
workers or low-income citizens,,joint venture contracts, and service contracts, to name a few. For
a comprehensive discussion of the various techniques of privatization and the problems
involved in their implementation, see Charles Vuylsteke, Techniques of Privatization of
State-Owned Enterprises: Voluine I - Methods and linpleinentation (Washington, D.C.: World
Bank, 1988);Madsen Pirie, Privatization (Hants, UK: Wildwood House Ltd., 1988); Jones, et.
al., Selling Pblic Enterprises: A Cost-Benefit Methodology;and William T Gormley, Jr., ed.,
Privatization and Its Alternatives (Madison, WI: U. of Wisconsin Press, 1991).
9"Partial" is used here to mean a sale of greater than 50% of a public enterprise to private
actors.
10Albert 0. Hirschman, Shifting Involveinents: Private Interest and Pblic Action (Princeton,
NJ: Princeton
U. Press, 1982).
7
privatization -- not least the legion of accountants, investment bankers and
lawyers who have constructed an entirely new niche in corporate finance.
Second, due to this visibility and import, sales of public enterprises are
easier to examine and present discrete cases for analysis. As stated above, I
will examine the German government's sale of Lufthansa to test five distinct
theories of privatization, and to explore the implications of privatization for
the traditional "German model." The case of Lufthansa was chosen for a host
of reasons, the most important being: its size and importance for the German
economy; its position in an increasingly competitive international service
industry; its history as a tightly controlled state enterprise with industrial
policy importance in terms of employment and competitiveness; an 'd its role
as a model for the future privatization. of Deutsche Telekom in 1996.
Furthermore, the Lufthansa restructuring program, implemented to facilitate
privatization, was hailed as the exemplar of a "new German model" of
industrial relations.
Accordingly, this study will consist of three parts. The rest of this
chapter will briefly outline five alternative theories of privatization -- each
answering the question, "why do states privatize public enterprises?" The
second chapter will explore the privatization of Lufthansa in detail, describing
two distinct phases of privatization: first, the failed attempt by Finance
Minister Gerhard Stoltenberg in 1984-85;and then the successful partial
privatization in autumn 1994. Finally, the concluding chapter will apply the
Lufthansa case to the theories outlined in chapter to determine which
factors were most important in the German privatization campaign of the
early 1990s. A final section in chapter 3 will discuss the implications of the
Lufthansa privatization for the traditional "German model" of industrial
relations, and will explore future directions and challenges for each of the
social partners in Germany's political economy.
LB Alternative Theories of Privatization
The motives behind privatization are as many and varied as the
individual privatizations themselves." Examining the literature, however,
1IDue to their complexity, privatization initiatives are very difficult to model theoretically.
As a result, much of the political economy literature on privatization is descriptive and
confined to case-by-case analysis. This presents a problem for the social scientist which, I
8
five main categories of explanation can be identified. These five theories of
privatization
are: 1) economic; 2 budgetary; 3 ideological; 4 domestic
political; and 5) international. Each of the theories outlined below is, to some
degree, an ideal type. I do not maintain that lines arbitrarily drawn between
various theories are impermeable. In fact, the privatization of Lufthansa was
the result of a mix of many factors. The goal of this study, however, is to
discover which factors were most important in the decision to privatize
Lufthansa, and to examine the wider ramifications of the Lufthansa
privatization process for the company itself, and for the German model.
With this important introduction, I will now outline these theories of
privatization which will be tested by the case of Lufthansa.
1.13.i The Economic Theory of Privatization
The economic argument for privatization rests on the idea that public
enterprises lack the same incentive structures as private firms.12 As a result,
they are more inefficient than private firms in terms of internal production
efficiency, prices, and profitability. Specifically, a public enterprise eludes the
following market disciplines on management behavior: 1) there is no
fiduciary duty to maximize profits for shareholders; 2 a public enterprise is
insulated from threats of takeover; and 3 the pblic enterprise is also
submit, is common in the field of political economy. On the one hand, does one focus on trying to
construct and test theories of privatization which, although refutable in individual cases,
nonetheless offer a degree of generalizability and provide a benchmark for empirical research?
Conversely, does one pick a case or set of cases based upon their intrinsic interest to the
examiner, and then proceed to explain why that particular event happened, drawing specific
conclusions which may point to general trends? Each approach is logically sound, and I do not
presume to assert the worth of one over the other. This section, however, will build several
theories from observations contained in the literature, and then attempt to test these theories
1 examiningthe case of Lufthansa.
A great volume of economic literature exists on privatization, some works focus on policy
prescription and analysis, while other studies focus on formal economic modeling. just to note
some of the major economic works on privatization, see John Vickers and George Yarrow,
Privatization: An Economic Analysis (Cambridge, MA: MIT Press, 1988); Dieter 136s,
Privatization: A TheoreticalTreatment (oxford, UK: Clarendon Press, 1991); Dennis J. Gayle
and Jonathan N. Goodrich, eds., Privatization and Deregulation in Global Perspective (New
York: Quorum Books, 1990); GladeState Shrinking: A Comparative Inquiry into Privatization
Jones, et. al., Selling Public Enterprises: A Cost-Benefit Methodology;and E.N. Suleiman and J.
Waterbury, eds., The Political Economy of Public Sector Reform and Privatization (Bouider,
CO: Westview Press, 1990).
9
shielded from bankruptcy and reorganizations As the state holds all
residual rights associated with property ownership (use, extraction of benefits,
and transfer), it can choose to pursue welfare goals, such as employment
positions or low pricing for lower income citizens, as opposed to profitmaximization. In addition, the following negative aspects of public
enterprises have been highlighted by economists:14
• production inefficiency and lack of innovation;
• artificially high wages and over-protection of workers and
management, fueling high production costs;
o a high public cector borrowing requirement (PSBR) to fund a
substantial public sector may crowd out private investment;
many public enterprises are active in sectors where they are
the only producer, thus they restrict consumer choice; and
* the political objective functions of bureaucrats running public
enterprises differs from the original public interest rationale for
nationalization.
Assuming, along with most economists, that governments can meet
welfare objectives either through general macro-economic policy or through
direct transfer payments, as opposed to the operation of public enterprises,
privatization allows governments to solve these efficiency problems through
the transfer of ownership from public to private actors. From a supply-side
perspective, internal efficiency would improve in these enterprises due to the
introduction of market incentives. On the demand-side, increasing internal
13WIadimir Andreff, "French Privatization Techniques and Experience," in Ferdinando
Targetti, ed., Privatizatinn in Europe: West and East Experiences (Brookfield, VT: Dartmouth
Publishing Co., 1992). Furthermore, public enterprises often have access to capital investment
on generous terms either from the state treasury itself, or from special arrangements with
commercial banks.
14See generally, Ferdinando Targetti, "The Privatization of Industry with Particular Regard
to Economies in Transition," in Ferdinando Targetti, ed., Privatization in Erope: West and East
Experiences (Brookfield, VT: Dartmouth Publishing Co., 1992); David Steel and David Heald,
"Privatizing Public Enterprise: The Record of the UK Conservative Government 1979 - 1983, in
William P. Glade, ed., State Shrinking: A Comparative Inquiry into Privatization (Austin, TX:
Institute of Latin American Studies, 1986); Vickers and Yarrow, Privatization:An Economic
Analysis; and Bbs, Privatization: A Theoretical Treatment
10
efficiency could lead to decreasing prices for consumers, enhancing
distributional welfare in tandem with allocative efficiency.15
The economic debate on the advantages of a change in ownership par
se is complex ad highly contested. Empirical work comparing public, private
and mixed enterprises reveals no clear case for a particular form of ownership
in terms of greater efficiency-16 In general, private enterprises were found to
be slightly more efficient than public or mixed enterprises. More important
in determi-ung relative efficiency gains, however, is the competitive
environment in the relevant industry. In competitive markets, here price
elasticity was high, there could be both efficiency and welfare gains -- as both
prices and production costs fall. Yet in monopolistic sectors, such as utilities,
privatization could result in minimal efficiency gains and monopoly rents.17
The case of oligopoly is more complex. Although Baumol's theory of
contestable markets maintains that the threat of potential competition is
enough to condition private managers to avoid rent-seeking and to maximize
efficiency,18 subsequent research reveals that incumbents in even contestable
15An important preliminary question, however, is whether the state can sell an enterprise to
begin with. As Jones, et. al. 1990) state the theoretical paradox: "if a public enterprise is
making money, the government won't sell it; if it's losing money, the private sector won't buy
it." In reality, the public and private sectors value a public enterprise differently due to the
private sectors' belief that sufficient efficiency gains can be made under new business and
management conditions to outweigh the initial costs of purchasing the public enterprise. This
differential in valuation, rather than the price of the enterprise itself, is what drives
privatization. Jones, et. al., Selling Public Enterprises: A Cost-Bene t Methodology. The same
illusion holds for the offering price for a public enterprise when it is privatized. In theory, the
offer price should be equal to the net present value of the expected revenues of the enterprise,
thus creating no incentive for the government to part with any enterprise (as long as it was not
losing money, in which case the private sector theoretically would not be interested anyway).
Yet the belief in efficiency gains causes the offer price to be above this expected value,
assuming the government does not sell the enterprise at an artificially low price, as in the case
of so-called "employee shares," to be discussed below. See Stevens, "Prospects for Privatisation
in OECD Countries," 222. This begs the question of how such perceptions are formed.
Specifically, what is the case for efficiency gains on the basis of the character of ownership
alone? The following section outlines this debate.
16Fo a review of the major empirical studies in this regard, see Dieter 136s,"Privatization in
Europe: A Comparison of Approaches," Oxford Review of EconomicPolicy, 91 (September
1993): 95-111; B6s, Privatization: A Theoretical Treatment
50-59.
17The seminal article on the importance of market competition, as opposed to the character of
ownership per se, in evaluating the gains to privatization is John A. Kay and David Thompson,
"Privatisation A Policy in Search of a Rationale," The Economic ournal 96 (March 1986): 1832. See also Vickers and Yarrow, Privatization: An Economic Analysis and Bbs,
"Privatization in Europe: A Comparison of Approaches," 95-111.
18W.J. Baumol, J.C. Panzar and R.D. Willig, Contestable Markets and the Theory of Industry
Stnicture (New York: Harcourt Brace Jovanovich, 1982). Contestable markets theory was often
used within the context of airlines due to the natural limitations of airport infrastructure and
11
markets have enormous advantages (reputation, fixed investment,
incentives to oppose new entry and to adopt predatory pricing in the absence
of regulation) which effectively preclude serious threats of entry.19
Although the validity of the assertion that market competition is as
important as the character of ownership in improving the efficiency of public
enterprises through privatization is highly debated, even assuming its truth
leads to a secondary debate among economists as to the proper policy
response. Just a few of the alternatives to privatization include:
* changing the legal form to a private-law corporation whose
shares and 100% owned by the state;
* replacement of the management;
* reduction of union power (for example, by restructuring the
enterprise into smaller units under a holding-company
structure); and
o creation of competition by facilitating market entry 20
Each of these alternatives seeks to retain state-ownership while
introducing competition to foster the growth of market incentives.
Opponents of these alternatives, however, emphasize the importance of
owning the residual rights to an enterprise as central to shaping the incentive
structure facing managers. For example, the literature in public choice theory
places great weight on the numerous layers existing between the ultimate
owners of public enterprises (the taxpayers) and their counterparts in private
firms shareholders). As Hanke and Walters 1990) argue:
"[flublic enterprises are not owned by individuals who have a
residual claim on the assets of these organizations. The nominal
the substantial "fixed" (as opposed to "sunk") costs associated with operating a global air
carrier.
19See David J. Thompson, "Privatisation in the U.K.: De-regulation and the Advantage of
Incumbency,"
European Economic Review 31 1987): 368-374; Jones, et. al., Selling Pblic
Enterprises: A Cost-Benefit Methodology ; 136s,Privatization: A Theoretical Treatment An
exception to this general rule is the case where firms enter the market only for a brief time to
exploit an unmet demand, only to leave after sufficient profits had been made and incumbents
had responded by expanding production to meet this demand (cream-skimming)
2ODescribed in B6s, "Privatization
in Europe: A Comparison
of Approaches," 95-111.
12
owners of public enterprises, the taxpayer-owners, cannot buy
and sell public enterprise assets. Consequently, taxpayer-owners
do not have strong incentives to monitor the behavior of public
managers and employees.
Taxpayer-owners could capture some benefits from
increased efficiency of public enterprises through tax reductions.
However, if realized, incremental benefits from improved
efficiency would be spread over many taxpayers, so that
individual benefits would be rather small. In addition, the
individual's cost of obtaining these benefits -- acquiring
information, monitoring bureaucrats, and organizing an
effective political force to modify the behavior of public
managers and employees -- would be very high. Add to this the
lack of threats from potential corporate takeover specialists and
the near impossibility of bankruptcy for public enterprises, and
we have significant differences between public and private
enterprises.1121
Ms also emphasizes the importance of sending a signal to domestic
and foreign capital markets in order to attract investment and reduce the
demand on government funds.22 He argues further that only a change in
ownership will necessitate both the internal restructuring and additional
policy developments to foster increased efficiency and welfare gains from
former public enterprises. Ultimately, however, the arguments of public
choice theorists, and of Bbs, hinge on the preference for one set of principal-
agent relationships (shareholders-private managers) over another (votersgovernment bureaucrats-public managers). The contours of the principalagent problem are therefore essential to the economic theory of privatization.
In a nutshell, principal-agent theory explains inefficiency as a result of
two complications in the principal-agent relationship: 1) the principal and
agent do not share the same goals; and 2 the agent possesses an information
advantage over the principal. Thus, structures must be found which create
incentives for the agent to act in the principals' interest, and the principal
must have some tools which allow him to gain access to information
21Steve H. Hanke and Stephen J.K. Walters, "Privatization and Public Choice: Lessons for the
LDCs," in Dennis J. Gayle and Jonathan N. Goodrich, eds., Privatization and Deregulationin
Global Perspective (New York: Quorum Books, 1990), p. 98. For a reply to public choice theory
on privatization, see Paul Starr, "The Limits of Privatization," in Dennis J Gayle and Jonathan
N. Goodrich, eds., Privatization and Deregulation in Global Perspective(New York: Quorum
Books, 1990): 109-125.
22B6s,"Privatization in Europe: A Comparison of Approaches," 95-111.
13
concerning the operation of the enterprise. The more layers between the
ultimate principal and the acting agent, the more information problems
hinder efficiency and the ability to monitor and control the agent's (in this
case, the manager's) behavior-23 As Figure 1.1.illustrates, public enterprises
tend to have more layers between principals (taxpayers) and agents (public
sector managers), than private corporations.
Public enterprises
taxpayers /voters
Private corporations
__
I
I
elected officials
I
I
I
bureaucrats /ministries
I
public enterprise
Imanagers
Figure U: Alternative Principal-Agent Tracks
(Adapted from Bbs, 1993)
Simply shifting the principal-agent relationship from the model on the
left to the one on the right will not solve monitoring and information
problems. In fact, a disperse group of shareholders is a functional equivalent
to the mass of taxpayers in the public enterprise model. In both cases,
23See Vickers and Yarrow, Privatization: An EconoinicAnalysis B6s, "Privatization in
Europe: A Comparison of Approaches," 95-111; Saul Estrin and Virginia Nrotin, "The
Regulation of British and French Nationalised Industries," European EconoinicReview 31
(1987): 361-65.
14
managers are relatively free from close scrutiny and enjoy significant
information advantages over principals. The main difference, then, is the
introduction of other, market-based incentive structures, such as the concept
.of fiduciary duty, the threat of takeover, and the possibility of bankruptcy. Yet
each of these systems is also dependent on important institutional factors,
such as the strength and tenacity of the shareholder-plaintiffs' bar, the
maturity of domestic securities exchanges, and the willingness of the
government to allow an important industries to go into liquidation.
Moreover, the original discussion on the competitiveness of the industry in
question is also decisive. If a monopoly is transferred to the private sector,
then private managers, insulated from their principals and customers, have
the capacity to avoid maximizing efficiency and reducing price.
Accordingly, the question of regulation (or deregulation) is closely
connected with debates on privatization. Clearly, a complete discussion of
this complicated and fascinating field in economics is beyond the scope of this
study. With respect to privatization, however, regulation is a key element in
programs to privatize traditional "natural" monopolies such as
telecommunications, utilities, and some areas of transport, such as
railroads-24 In each case, the government must decide the extent of
regulation, which may threaten both the revenues raised by privatization (by
reducing the sale price) and the efficiency gains to transferring ownership to
private hands.25 The government, in its role as the "framer" of privatization
24Since Great Britain has the broadest experience with privatizing and regulating such
enterprises, much of the literature in this field focuses on the British experience. See, for
example, John Kay and John Vickers, "Regulatory Reform in Britain," EconomicPolicy 7
(October 1988):288-351;Mark Armstrong, Simon Cowan and John Vickers, RegulatoryReform:
EconomicAnalysis and British Experience(Cambridge, MA: MIT Press, 1994); David Heald,
"The United Kingdom: Privatisation and its Political Context," West Eropean Politics, 11:4
(October 1988):31-48; Alastair McAuley, "Market Failure Versus State Failure," in Ferdinando
Targetti, ed., Privatization in Europe: West and East Experiences (Brookfield, VT: Dartmouth
Publishing Co., 1992);John A. Kay, "Introduction: Public Ownership, Public Regulation or Public
Subsidy?"
European Economic Review 31 1987): 343-345; and Cento Veljanovski, Selling the
State: Privatisation in Britain (London: Weidenfeld and Nicolson, 1987).
25A technique which has a similar effect is the retention of a so-called "golden share,"
whereby the state retains 25% of the shares of the newly rivatized company in order to veto
changes in ownership and control of the enterprise, and to influence important firm decisions.
Such an action seriously impairs the takeover discipline of private-sector managers, and again
brihgs into question the efficiency and/or control gains to privatization. See Cento Veljanovski,
"Privatization: Progress, Issues, and Problems," in Dennis J. Gayle and Jonathan N. Goodrich,
eds., Privatization and Deregulation in Global Perspective (New York: Quorum Books, 1990):
63-79. The German government originally planned to retain a strategic 25.1% share in
Lufthansa following privatization in 1994, see Bundesminister der Finanzen, Bericht des
15
(to borrow Ws' 1993) term), must ultimately weigh its interests in welfare
goals against the efficiency gains of switching to the profit-motive through
privatization. Obviously, this decision is not solely based upon the economic
debates outlined here. Rather, they are the result of a highly political process
motivated by specific political goals, in addition to concerns of economic
efficiency. Therefore, we must now turn to alternative, political theories of
privatization.
1.B.ii The Budgetary Theory
A more banal economic motive behind privatization is the reduction
of state debt, preferably without tax increases. Governments are most likely to
privatize state enterprises to meet domestic budgetary goals if two principal
conditions exist. First, the government faces a debt burden which is (or at
least is perceived to be) unacceptably high. Second, the public sector itself is of
sufficient size, such that privatization could actually impact debt levels.
The sale of public enterprises, particularly loss-making or inefficient
ones, is beneficial to fiscally constrained governments in a number of ways.
First, revenues from sales represent an instant, albeit 11.
one-shot," infusion of
capital which can be directed toward debt reduction or other government
programs. Second, the state is spared both operating expenses and future
potential bail-out costs for these enterprises in times of economic downturn
or industry crisis. Third, selling off key assets may consolidate the state's
portfolio, thereby reducing the number of public enterprises and narrowing
administrative activities to a more manageable level.26 At the same time,
however, although (in theory) the sales price of a public enterprise is
supposed to equal the net present value of future income from the enterprise
in question,27 it is often the case that sales prices are either politically
Bundesministers der Finanzen zur "Verringerung von Beteiliglingen ind Liegenschaften des
Bundes" (Bonn: Bundesministerium
der Finanzen, 13 July, 1992).
26The advantage of this consolidation is that the state can concentrate on unprofitable, "truly"
public activities, such as postal delivery, tax collection, etc. The government also,,avoids
popular disapproval for poor service or product provision by shifting responsibility to the
private sector. The down-side of consolidation is that internal cross-subsidization is no longer
easy to achieve. That is, loss makers can no longer be subsidized by profitable state enterprises.
This could lead to tax increases or other forms of revenue increasing, as well as new or increased
regulation, the costs of which may outweigh the original fiscal advantages of privatization.
27Stevens , "Prospects for Privatisation in OECD Countries," 222.
16
determined, or are affected by the fact that the enterprise for sale is a natural
monopoly (or is the main actor in an oligopolistic market).
As discussed above, there is significant debate in the economic
literature about the advantages of private as opposed to public ownership for
enterprises in non-competitive industries, and empirical work suggests that
private ownership does not automatically translate into efficiency gains,
particularly in monopolistic or oligopolistic markets. This raises interesting
for governments with respect to their ex ante calculations of the net
costs and benefits of privatization. It may be the case that a highly regulated
private monopoly will be both inefficient and more costly to the government,
in terms of the costs of monitoring predatory behavior, than were the costs of
direct government ownership and control. One limitation to the budgetary
theory, however, is the fact that high debt levels have been a common
phenomenon in most states throughout history. Thus, it remains unclear
why debt reduction should facilitate such a massive embrace of privatization
in the 1980s and 1990s in contrast to previous eras of budgetary crisis.28 An
alternative theory argues that privatization may be the product of ideological
motives, rather than a sterile cost-benefit analysis.
LB.iii The Ideology Theory
Another theory of privatization emphasizes the role of ideology as its
primary motive. Specifically a resurgence of "anti-statism" across both
developed and developing states leads to a critical re-evaluation of the role of
the state in the economy, and a resolution to redraw these boundaries in
favor of the private market. Anti-statism consists of two distinct elements.
The first builds upon the economic discussion above with respect to public
choice or neoclassical theories of public enterprises. According to these
approaches, state control over industry distorts incentive structures within
public enterprises by politicizing them and removing them from the market.
Public managers illustrate both the moral hazard problem of being insulated
from the economic effects of poor performance -- e.g. there is no possibility for
the state phone system or the postal service to be taken over or to go bankrupt
-- and the related principal-agent problem of being unaccountable directly to
28High debt levels may, in fact, have contributed to nationalization movements in advanced
states followingWorld War II, and, more recently, among developing states.
17
their customers (citizens) and possibly to the government itself (through
bureaucratic autonomy). An unsophisticated version of the incentives prong
of the anti-state position is that public enterprises are a priori inefficient, and
that private monopolies are preferable to public ones-29
The second prong of anti-statism is a general appeal to individual
freedom. Transferring ownership and control over public enterprises to
private actors provides individuals not only with greater choice as consumers
as a result of increased competition and market responsiveness, but also the
freedom to become owners themselves. Thus, selling the government's stake
in public enterprises also promotes increased and more wide-spread
ownership of property. Empirically, however, it is unclear whether this
"democratization" of ownership has actually occurred because of
privatizations
In sum, anti-statism revolves around belief that the state is
an inefficient economic actor, that private owners and managers can produce
more efficient and distributionally acceptable economic outcomes, that
private ownership increases the transparency and accountability of formerly
public enterprises, and that privatization ehances individual freedom.
The ideological theory is appealing due to the recognition that the
emergence of monetarism in various guises (Thatcherism, Reaganomics)
appears to be the mrror image of the Keynesian revolution following World
War IL It seems intuitively true to claim that neoclassical economic theory is
an ideological force behind the rush by many states to privatize public
holdings, particularly in industrial sectors. We would expect, therefore, that
states with conservative (classical liberal) governments would be more likely
to have substantial privatization programs relative to social democratic states.
We would also expect that governments motivated primarily by ideology
would be less concerned with maximizing sale price, or with the resolution of
particular welfare issues prior to privatization. Instead, governments
motivated by ideological concerns will be interested mainly in transferring
public enterprises as quickly as possible into private hands. Finally, the
ideological theory is appealing due to its potential to fill a hole in the political
29SeeBaumol, et. al.,
Contestable Markets
andtheTheory of Industry Structure Milton
Friedman, Capitalismand Freedom(Chicago: Univ. of Chicago P. 1962).
3OSeeVickers and Wright, "The Politics of Industrial Privatisation in Western Europe: An
Overview," 130.
18
economy literature which avoids rigorous discussion of the role of ideas as
shaping policy choice.
There are numerous problems with the ideological theory, however,
which can be broken down into empirical and methodological limitations.
With respect to empirical doubts, it seems clear that the character of the
ruling government is not a controlling factor with respect to the zeal of
privatizers. For example, France adopted a more vigorous privatization
program under a socialist government than Germany under a freemarket/conservative coalition in the mid-1980s. Although the visible
example of Great Britain under Thatcher best illustrates the ideology theory,
numerous countries with moderate privatization programs need a more
sophisticated model to explain variation between states. This leads to
methodological issues surrounding the ability to test the ideological theory.
Governments are rarely consistent in justifying policy initiatives, and, as
Vickers and Wright 1988)point out, some privatization campaigns are
justified ex post rather than ex ante. As the institutionalist literature
emphasizes, policy-making structures, which vary among states, may go
further in explaining how ideas become distorted or transformed during the
policy-making process.31
Some scholars have attempted to operationalize an ideas-based
approach to policy-making by grafting institutionalist analysis onto an
ideological perspectives Perhaps the most compelling work in this regard is
Peter Hall's edited volume The Political Power of Economic Ideas 1989),
which documents the acceptance or rejection of Keynesianism in various
states. Starting with the assumption that ideas matter, Hall defines particular
institutional features of a political economy which affect openness to new
ideas during a particular era. Structures such as the relative autonomy of the
executive branch and the civil service, the existence of a strong central bank,
and collective experiences with policy successes and failures all impact the
capacity of an idea, such as privatization, to transform official government
31See e.g., Sven Steinmo, Kathleen Thelen and Frank Longstreth, Structuring Politics:
Historical Institutionalism in Comparative Analysis (New York: Cambridge, UP, 1992).
32See Peter A. Hall, ed., The Political Power of Economic Ideas: Keynesiansim Across Nations
(Princeton, NJ: Princeton UP, 1989);Sheri E. Berman, Ideasand Politics: Social Democratic
Partiesin Interwar Europe (PhD. dissertation, Harvard University, Government, 1994).
19
policy. Thus, variation between states can be traced to differences in these key
institutions.33
Due to features such as the division of power between federal and Land
governments, the existence of broad-based centrist parties, and the political
consensus surrounding the acceptance of the Sozialmarktwirtschaft we
would expect privatization in Germany to have a profoundly non-ideological
tone. Nonetheless, it is important to bear in mind the importance of the
ideas behind privatization in examining the case of Lufthansa, with a view
toward analyzing how institutional factors within Germany actually shape
these ideas and transform them in the policy-making process. It is more
likely, therefore, that one of the other privatization theories (or' some
combination of them) would go further in explaining the motives behind
privatization in Germany. A fourth theory of privatization, for example,
stresses domestic political goals as the primary motive behind privatization.
1-B.iv The Political Consolidation T
Beyond economic and ideological motives, there may be additional
political motives for privatization which are more strategic than the political
goals of seeking popular approval through debt reduction and the
elimination of inefficiencies. Literature on popular capitalism reveals that
one domestic political motive of governments with respect to privatization is
the entrenchment of denationalization through the creation of a new, broad
property owning class.34 Some states, for example Germany during the late
1950s and 1960s, will offer shares to lower income citizens and workers at a
works comparing the institutions of various states with respect to the pace and
scope of privatization include: Vincent Wright, ed., Privatization in Western Europe:Pressures,
Problemsand Paradoxes(London: Pinter, 1994);Estrin and P6rotin, "The Regulation of British
and French Nationalised Industries," 361-65 (comparing British and French executive and
bureaucratic structures); Gayle and Goodrich, Privatization and Deregulation in Global
Perspective Glade, State Shrinking: A Comparative Inquiry into Privatization Gordon
Smith, "The Nature of the Unified State," in Gordon Smith, William E. Paterson, Peter H.
Merkl and Stephen Padgett, eds., Developmentsin German Politics (Durham: Duke UP, 1992)
(comparing the structure of the executive in Germany to other European states). For reviews of
the distinctive institutional features in Germany, see Klaus Knig, "Developments in
Privatization in the Federal Republic of Germany: Problems, Status, Outlook," International
331mportant
Review of Administrative
Sciences, 54 1988): 517-551; Ingo Vogelsang, "Deregulation
and
Privatization in Germany," Journalof Public Policy 82 (April - June 1988): 195 - 212.
34See Vickers and Wright, "The Politics of Industrial Privatisation in Western Europe: An
Overview," 130.
20
substantially reduced price per share to induce their investment in newly
privatized enterprises-35 This serves several purposes. First, it facilitates an
J.'equity-holding ethos" which may attract international capital flows to
domestic securities exchanges. Second, it insures against future
renationalization by making it more expensive, both fiscally and politically,
for opposition (usually social-democratic) parties who may gain power.
Third, it cultivates electoral support among sectors of the population who
may not otherwise support center-right governments.
"Popular capitalism," as such initiatives are labeled, serves not only to
entrench denationalization and cultivate support for the ruling
(conservative) government. Many scholars argue that privatization is a tool
to weaken social-democratic parties and particularly labor unions.36 Not oly
are vested property rights created within these movements which may
preclude a unified opposition to renationalization, but shifting ownership to
the private sphere replaces social objectives with profit maximization. This
undermines both the objectives of social democratic movements and the
legitimacy of their leaders, who are now in a less favorable position to protect
welfare interests.
After the failure of Volkskapitalismus in the 1960s in Germany, the
desire to divide the union movement seems to have faded as a motive for
German privatization. The results of the British program in the 1980s are
also mixed, as most shareholders sold their interests shortly following
privatization.37 Despite the absence of "people's shares," the German
government in the 1980s did offer special shares to employees of privatized
companies. Moreover, the goals of dividing unions and social democratic
opposition parties can be served through means other than people's shares in
conjunction with privatization, as the restructuring program at Lufthansa
prior to privatization illustrates. The appeal of the political consolidation
theory, therefore, is its inclusion of party politics in considering what
motivates privatization, particularly for conservative governments. A final
35Richar A Hawkins, "Privati-'sation in Western Ger -many, 1957 to 1990," National
Westminster Bank Quarterly Review (November 1991): 14-22.
36See Vickers and Wright, "The Politics of Industrial Privatisation in Western Europe: An
Overview," 130; B6s, Privatization: A Theoretical Treatment
37Peter Curwen and David Holmes, Returns to Small Shareholders from Privatisation,"
National Westminster Bank Quarterly Review (February 1992): 41-58.
21
privatization theory, however, focuses on how international forces transform
domestic institutions instead of being exclusively shaped by them.
LB.v The Int-ernatimalization Theory
Finally, there is an internationalization theory which maintains that
growing product and financial market globalization is causing governments
to privatize state industries in competitive sectors in order to facilitate their
survival and success.38 Within the European context, internationalization
influences privatization in three ways. First, the globalization of
international finance not only appears to constrain macro-economic pliCy,39
but, more positively, it provides an additional source of investment capital
for domestic industry, particularly for enterprises to be privatized.40
Moreover, attracting these flows through privatization initiatives may serve
to mature domestic stock exchanges which could attract flows for other
domestic industries. These aspects are critical for Germany, where traditional
bank-industry links are weakening due to the liquidity squeeze of unification.
Second, international trade flows pressure exposed industries to
rationalize production, to adjust to new global market demands, and to adopt
new technologies. These pressures manifest themselves in three distinct
forms. First, states recognize that structural adjustment is best managed by
private actors acting on market signals. This relates to the ideological motive,
and represents a recognition by the state that private actors are better
positioned to gain access to global market information. Private managers,
freed from political pressures commonly used by public enterprises to shield
themselves from increasing competition, can implement necessary cost
cutting measures, reorganization plans, and investment strategies. Second,
growing international competition and technological developments have
combined to erode traditional natural monopoly justifications for public
enterprise. This is most evident in international telecommunications
38Stevens, "Prospects for Privatisation in OECD Countries," 222. Stevens argues that, while
domestic economic factors were the engine of privatization in the 1980s, international pressures
will be the dominant force for privatization in the 1990s.
39jeffry A. Frieden, "Invested Interests: The Politics of National Economic Policies in a World
of Global Finance," International Organization 45:4 1991): 425451.
4OAtthe same time, one could question whether this is a new development, as Marcello De
Cecco points that governments have always manipulated global financial markets to their
advantage. Unpublished presentation to CES - Harvard University, October, 1994.
22
liberalizations but is also the case for airlines. Ironically, through
application of free-market policies of private ownership and liberalization,
11nationalchampions" could emerge which, while being domestic
monopolies, nevertheless face international competition which pressures
such firms to reduce production costs and prices to consumers. A third way
in which trade flows affect change is through the mobilization of domestic
political actors. For example, cheaper telecommunications products and
services in America influenced business leaders and consumers in Europe to
lobby for greater liberalization to facilitate lower costs to both producers and
consumers.42
A third international pressure particular to the European states is the
role of the European Union in promoting liberalization. Brussels currently
lacks the authority to influence the pace of rivatization, and it is not clear it
would adopt this role if given the opportunity.43 Yet the process of
constructing the common market reinforces the pressures of trade flows in
competitive industries. Moreover, first movers, such as Britain, lobby for
greater liberalization, increasing the desire of competitors to transfer
management and ownership to private hands in order to initiate the
rationalization necessary to compete with other, "leaner" European firms.
For example, the fact that British Airways was in private hands and
41See Philip Genschel and Raymund Werle, "From National Hierarchies to nternational
Standardization: Model Changes in the Governance of Telecommunications," ournal of Public
Policy 13:3 (July-September 1993): 203-226;Wayne Sandholtz, "Institutions and Collective
Action: The New Telecommunications in Western Europe," World Politics 45 2 (January 1993):
242-270.
42See Genschel and Werle, "From National Hierarchies to International Standardization:
Model Changes in the Governance of Telecommunications," 203-226;Sandholtz, "Institutions
and Collective Action: The New Telecommunications in Western Europe," 242-270. The erosion
of natural monopoly justifications for public enterprises is complemented by a new consumerism
which mobilizes domestic coalitions in support of liberalization and privatization. For a
general treatment of the relationship between international trade flows and domestic political
coalitions, see Ronald Rogowski, Commerceand Coalitions(Princeton, NJ: Princeton UP, 1989).
43 B6s, "Privatization in Europe: A Comparison of Approaches," 95-111. Bbs explains that
Article 222 of the Treaty of Rome is neutral with respect to the character of property ownership
(a reflection of the substantial public sectors in key states, such as France, at that time). At the
same time, however, Bbs envisions convergence upon European-wide privatization based on one
of two alternative pressures: 1) competition in the European market from efficient private firms
will pressure public enterprises to rationalize, which is best done in conjunction with
privatization; or 2 the EU Commission will begin to apply competition law (pursuant to
Article 90) more rigorously in order to break up state monopolies in such sectors as
telecommunications and air transport.
23
flourishing was an additional influence pushing the German government to
privatize Lufthansa.
The internationalization theory has several advantages. First, it
captures the importance of the position of a political economy in the world
economy. Thus, as a state which depends heavily on exports as the main
source of economic growth, Germany would appear to be a good candidate for
careful analysis. Yet another advantage of the internationalization theory is
its simultaneous emphasis on competitive industries in addition to whole
economies. Such an approach could explain differences in the speed and
scope of privatization on a sectoral basis. Airlines and telecommunications,
for example, would be expected to be good candidates for privatization in any
state, while utilities may be a more controversial choice, given the local
nature of utility provision. Once again, however, one disadvantage to the
internationalization theory (like other theories of policy convergence) is its
equal unreliability for predicting and matching empirical results. Air France
remains a state-owned industry, as do many other public companies acting in
internationally competitive markets. Therefore, although the
internationalization theory goes farthest in escaping the constraints of
domestic institutions by describing the strong international pressures to alter
those institutions, these international forces must nonetheless work their
way through complicated domestic policy filters before emerging as new
policy.
LC Why -privatize now? Domestic Institutions aE Policy Filters
Each of the theories outlined above can be viewed as exogenous inputs
into a policy process whose mechanics are embodied in domestic institutions
which translate preferences into policy outcomes. Such a model is similar to
the one Gourevitch uses in Politics in Hard Times, and is schematically
depicted in Figure 12. Thus, in discussing privatization in Western Europe,
it is necessary to identify those key domestic institutions which affect the pace
and scope of privatization initiatives. In the interests of parsimony, three
principal institutions can be identified for comparative study: the structure of
executive policy-making power; the strength of the domestic securities
exchanges; and the health of the firms to be privatized.
24
Economic Theory
Budgetary Needs
M
Structure of executive power
Ideology
Political
Consolidation
Strength of securities exchange
International
Competition
Health of firms to be privatized
Exogenous
Domestic
factors
Institutions
Privatization
Ibb
Policy
Outcomes
Figure 12: The Privatization Process
The first important domestic institutional variable is the degree to
which the executive is free to implement privatization initiatives. This
implicates Katzenstein's strong state - weak state continuum.44 If the
executive is dependent upon the agreement of a ruling coalition, for example,
the process of privatization may be difficult to implement. Moreover, if socalled "distributional coalitions" enjoy access to the policy-making process at
many points, privatization would presumably be slowed and altered to reflect
these distributional concerns. Comparing Britain and Germany, for example,
one would expect the relatively strong British executive to be able to more
effectivelypursue privatization free from both delay and distributional
warping, whereas the reality of coalition government and cooperative
federalism in Germany give distributional groups greater access to affect the
pace and scope of privatization. Indeed, the evolution of the European
Union appears to have enhanced the power of the Ldtider to block federal
initiatives, or to amend them to address distributional concerns.45
44Peter Katzenstein, "Introduction" and "Conclusion," in Peter Katzenstein, ed., Between Power
and Plenty (Madison: University of Wisconsin Press, 1978); Peter Evans, Dietrich
Ruescherneyer and Theda Skocpol, eds., Bringing The State Back In (New York: Cambridge
University Press, 1985).
45Razeen Sally and Douglas Webber, "The Solidarity Pact: A Case Study in the Politics of
Unified Germany," German Politics, 31 (April 1994): 18-46.
25
A second major institutional variable is the structure of the capital
markets within states. This draws upon the late-developer thesis of
Gershenkron, as well as Zysman's typology of financial markets.46 Assuming
the government wants to raise the maximum amount of revenue possible
from its sale of state enterprises, and assuming it wants to achieve some
degree of broad private ownership to facilitate democratic and transparency
aims, a mature and effective securities market is vital to success. As
Veljanovski points out, the success of the market-mechanism in
conditioning economic decision-making depends not only on private
ownership per se, but on the transferability of that ownerships Although
the viability of the "market for corporate control" as a disciplinary force
facilitating efficient economic outcomes in the case of natural monopolies is
uncertain, an effective securities market is critical for the ability to effectively
privatize public enterprises.
In gauging the effectiveness or "maturity" of a securities exchange, one
must go beyond quantitative factors concerning the volumetric capacity of
domestic securities exchanges, to explore qualitatively how they are organized
and regulated. Vickers and Wright 1988)point out that exchanges had
surprisingly little trouble (volumetrically) in administrating share issues for
public enterprises due to the overwhelming domestic and international
demand for shares in these concerns.48 Yet this ignores the various
procedural safeguards which are critical to the functioning of an exchange for
purposes of the market for corporate control, which is essential for the market
mechanism to ensure efficient performance of these enterprises. For
example, a key factor dissuading American investors from actively investing
in the Frankfurt exchange was its lack of an effective insider trading regime,
which privileged institutional (normally bank) investors in Germany.49
46Alexander Gershenkron, Economic Backwardnessin Historical Perspective(Cambridge, MA:
Harvard University Press, 1962); John Zysman, Governments, Markets, and Growth (Ithaca,
NY: Cornell University Press, 1983).
47Veljanovski, Selling the State: Privatisation in Britain see especially chapter 4.
48Vickers and Wright, "The Politics of Industrial Privatisation in Western Europe: An
Overview," 1-30. This includes states where domestic securities exchanges were believed to be
virtually non-existent, as in Jamaica. See John Redwood, "Privatization: A Consultant's
Perspective," in Dennis J. Gayle and Jonathan N. Goodrich, eds., Privatization and
Deregulation in Global Perspective (New York: Quorum Books, 1990): 48-62.
49SeeDaniel J. Standen, "Insider Trading Reforms Sweep Across Germany: Bracing for the Cold
Winds of Change," Harvard International Law journal, 36:1 (Winter 1995):177-206.
26
Such qualitative factors shape the methods and scope of privatization among
European states.
A final domestic factor which straddles the border of institutional and
more managerial inputs to the privatization process is the economic health of
the specific firms targeted for privatization. Despite exogenous forces pushing
for privatization in particular industries, and despite facilitating institutional
conditions, if targeted firms are poorly situated to be subjected to private
market competition: 1) the government is unlikely to find investors; 2 the
price per share issued will be low; and 3 the resulting private company may
quickly go under in the face of intensified competition without access to state
subsidies. Ironically, however, the ability for state-appointed managers to
rationalize Lufthansa raises important questions concerning the supposed
impossibility of efficient management under state ownership. Although
rationalization was implemented "under the shadow of impending
privatization," reforms were nonetheless initiated under state "control."
In sum, the case of Lufthansa will test five distinct theories of
privatization to add more empirical evidence with which to evaluate the
question of why states privatize public enterprises. Beyond this goal,
however, this study will attempt to place privatization within the broader
context of changes in the traditional "German model" of industrial relations.
Original motives are translated into policy through distinctive domestic
institutions -- in this case, those of the traditional German model. Yet as
Figure 12 indicates, there is room for feedback effects frorn. the process itself,
as well as from its final outcome. These feedback effects are the core of the
changing German model, and will be explored in the conclusion in chapter 3.
First, however, the case of the privatization of Lufthansa needs to be carefully
documented in order to approach both goals of this study.
27
Chapter 2 The Privatization of Lufthansa
The privatization of Lufthansa took over ten years to complete after it
was initially proposed in 1984, and illustrates the many institutional hurdles
to privatization in Germany. The many legal and social obstacles to the sale
of the goverrunent's remaining 36% share provide a further example of the
conflict between traditional industrial policy goals and the new shift toward
deregulation and privatization in western Europe. In this chapter I will
examine the case of Lufthansa in four parts. The first part, discusses the
history of the public sector in post-World War II Germany and the corporate
history of Lufthansa. Second, I will examine the first attempt by Finance
Minister Gerhard Stoltenberg to partially privatize Lufthansa in 1984-85.
Third, the successful initiative of Finance Minister Theo Waigel in 1990-94
will be explored. Finally, I will conclude with a brief discussion of the current
and future challenges facing Lufthansa and its social partners as they attempt
to complete the privatization project and to improve Lufthansa's competitive
position in the international air travel industry.
2.A A Brief History of Public Enterprises in Germany From 1945 to 1983
To place the privatization of Lufthansa in wider historical context, it is
useful to survey the origins and character of the public sector in Germany
since 1945. An important preliminary distinction must be made between
public enterprises at the federal level and those at the Land or municipal
level. Consistent with Germany's federal structure and the division of
administrative power between federal and Under governments, a sizable
portion of public activities are under the control or ownership of Land or
local authorities. Land assets typically include banks, utilities and other
industrial firms, while local enterprises include schools, baths, cleaning
services and waste disposal.50 While the federal government has frequently
50josef Esser, "'Symbolic Privatisation': The Politics of Privatisation in West Germany," West
EuropeanPolitics 11:4 (October 1988):61-73; updated in, "Germanv: Symbolic Privatizations in
a Social Market Economy," in Vincent Wright, ed., Privatization in Western Europe: Pressures,
Probleinsand Pamdoxes (London: Pinter, 1994): 105-121;Klaus Kbnig, "Developments in
Privatization in West Germany: Problems, Status, Outlook," International Review of
28
explored privatization possibilities, Under and local authorities are extremely
reluctant to privatize assets or contract out public services to private
providers due to the importance of these enterprises and services to regional
economies. This is particularly the case for regional banks, which provide a
vital source of investment capital for local industries, and hence are jealously
guarded by public authorities-51 This key difference between federal and
regional approaches to privatization within Germany explains why the pace
of privatization in Germany has lagged in comparison to other European
states, such as Britain or France, which lack such a division of authority.
Accordingly, in focusing on federal privatization, a significant portion of the
public sector in Germany is excluded from consideration-52
Limiting the discussion to federal holdings, three aspects are important
to consider: the size, origin, and character of public enterprises. Relative to
other western European states, the size of Germany's public sector was quite
small throughout the post-World War II era. For example, data from 1978
revealed that the share of total company turnover of public enterprises in
Germany was 39%, compared with 82% in Austria, 51.8% in Italy, 24.9 in
France and 12.5%in Britain.53 Ulike other western European states with
strong labor movements, Germany resisted the push to nationalize many key
industries after World War H. This was due not only to the weakness of the
groups supporting nationalization, but also because nationalization and a
strong central governmentwas linked to the abuses of the Nazi regime. This
legacy was also responsible for the federal structure of the Bundesrepublik
after 1949.
As a result, much of the public sector in post-War Germany
represented an inheritance from the Nazi regime (industrial concerns such as
Salzgitter and Volkswagen), the Weimar Republic (banks and related industry
holdings nationalized during the Depression-era), as well as the Prussian
Administrative Sciences, 54 1988):517-551; Ingo Vogelsang, "Deregulation and Privatization
in Germany," ournal of PublicPolicy 82 (April - June 1988):195 - 212.
51For an interesting work on the importance of regional bank-industry links, see Richard Deeg,
Banks ad the State in Germany (Ph.D. Dissertation, M.I.T. olitical Science Department,
1992).
52Cleariv', then, the future of privatization in Germany is heavily dependent upon attitudes at
the Land and local levels. This point will be discussed'in the conclusion in chapter 3.
53Esser, "Germany: Symbolic Privatizations in a Social Market Economy 109.
29
Empire (telecommunications and railroads).54 Following World War II,
many banks were returned to private ownership, but their corresponding
industrial holdings were not.55 While the size of the public sector did not
experience the expansion of other states, the existing public sector was both
socially accepted and, in the cases of the railroads, telecommunications and
post, and in Land navigable waterways, public ownership was protected by the
Grundgesetz, necessitating a two-thirds vote in both houses of parliament to
privatize them.56 In German company and budgetary law, public enterprises
are allowed to exist, but only if they serve a public interest and their functions
can not be provided more efficiently by the private sector-57 In sum, German
law is neutral with respect to the character of property ownership, with the
burden of proof on the government to define and defend its conception of the
public interest and the public sector's capacity to serve it.
During the immediate post-War era, both conservative and liberal
governments in Germany used the inherited public sector as a tool of
industrial policy. The Adenauer administration involved the public sector in
its efforts to reconstruct the German economy, and SPD governments in the
late 1960s and 1970s used the public sector as part of their overall Keynesian
demand-management initiatives.58 An important exception to this
consensus regarding the extent of the public sector was the first main
privatization initiative, the sale of Volksaktien ("people's shares") designed
by Ludwig Erhard in 1957.7.
Under the banner of Volkskapitalismus ("people's capitalism"), the
government proposed to sell its shares in certain public enterprises
(Volkswagen was the first firrn tabbed for the program) at discounted prices to
workers of those firms and to lower-income individuals. Due to political
54Esser, "Germany: Symbolic Privatizations in Social Market Economy," 108-9;Richard A.
Hawkins, "Privatisation in Western Germany, 1957 to 1990," National Westininster Bank
Quarterly Review (November 1991): 14-22.
5'Hawkins, "Privatisation in Western Germany,
1957 to 1990," 14-22.
56Esser, Germany: Symbolic Privatizations in a Social Market Economy," 108-9. The relevant
article is Article 87. Articles 134 and 135 stipulated that the holdings of Prussia and the Third
Reich in private companies would transfer over to the new government. Fritz Knauss,
Privatisierungs- und Beteiligungspolitik in der Bndesrepublik Deutschland (Baden-Baden:
Nornos Verlag, 1993), p. 128.
57K6nig, "Developments in Privatization in West Germany: Problems, Status, Outlook." K6nig
explains that the language of the relevant laws refers strictly to new businesses, although the
same criteria can be applied to existing public enterprises.
58Esser, "Germany: Symbolic Privatizations in a Social Market Economy," 108-9.
30
opposition, however, the government postponed its sale of Volkswagen
sha:es and elected to sell a portion of its interest in the former Prussian
mining firm Preussag in 1959 as a trial run for the program.59 This initial
success was followed by the partial privatization of Volkswagen in 1961 (the
federal government retained a 20% share) and of VEBA in 1965 (a 4.5%
retained share).60 Each share issue was substantially oversubscribed.
Despite this apparent success, several problems emerged with the sale
of Volksaktien which resulted in the cancellation of the program in 1965
following the VEBA sale. First, individuals who bought the shares at a
substantial discount would sell their shares the next day, when the price of
the shares on the market was in many cases several times the original
purchase price. Thus, the program had the unintended consequence of being
a simple transfer payment from the state to workers and lower income
individuals, rather than serving the original goal of creating a nation of small
equity-holders.61 Second, a downturn in the world market caused the VEBA
shares to actually lose value, resulting in government intervention to prop
the share price and further damaging public interest in investing in equity
shares.62 Finally, the ruling CDU-CSU/FDP coalition was forced in 1965-66 to
share power with the SPD, which opposed the Volksaktien program.
Accordingly, the Volksaktien program failed to create an equity culture in
Germany among individual shareholders, a trait that endures today in the
German political econorny. In 1990, only 11% of the population owned equity
shares, the rest preferring secure holdings in the form of savings accounts,
housing accounts or government bonds.63
59Hawkins, "Privatisation in Western Germanv, 1957 to 1990," 14-22 A Ministry of Federal
Property was established in 1957 to administer the privatization program.
6OHawkins, "Privatisation
in Western Germanv, 1957 to 1990," 14-22. it is interesting to note
that the Land of Lower Saxony strongly opposed the privatization of Volkswagen on industrial
policy grounds, so much so that it purchased 20% of the federal government's holding which
was sold.
61Esser, "'Symbolic Privatisation': The Politics of Privatisation in West Germanv," 61-73.
Similar problems appeared in Britain, where popular capitalism was also implemented.
Ironically, a study showed that small investors in Britain would have gained higher returns
had they held on to their shares in privatized industries as opposed to quickly selling them,
placing the money in a building-society account, or investing in a random sample of stocks. See
Peter Curwen and David Holmes, Returns to Small Shareholders from Privatisation,"
National Westminster Bank Quarterly Review February 1992): 41-57.
62Hawkins, "Privatisation
in Western Germanv, 1957 to 1990," 14-22.
63Esser, "Germany: Symbolic Privatizations in 'a Social Market Economy,"
111
.
31
Table 21: Size of Public Sector in (West) Germany 1970-89
Year
--Direct Holdinas
Total Holdings
(greater than 25% stake)
1970
97
697
1971
95
760
1972
93
776
1973
87
850
1974
88
865
1975
87
885
915
1976
1977
91
941
1978
90
938
1979
88
985
1980
86
899
1981
85
928
1982
84
958
1983
83
487
1984
81
474
1985
79
454
1986
80
463
1987
80
459
1988
77
412
1989
77
337
Source: Knauss, 1993
Under SPD/FDP governments in the late 1960s and 1970s, the public
sector in Germany expanded significantly, mostly through acquisitions by
existing public enterprises of competitors or downstream concerns. Esser
argues this was due mainly to growing international competition in the
industries where most public enterprises were active -- including coal, steel
and shipbuilding.64 As a result of 1970s acquisitions, "the number of
companies in which the federal State held at least 25% of the shares increased
from 697 in 1970 to 958 in 1982. The federal capital involved rose from 37 to 7
billion DM during the same period.,,65 This expansion is detailed in Table 21.
64Esser, Germany: Symbolic Privatizations in a Social Market Economy," 109.
65Esser, "'Symbolic Privatisation': The Politics of Privatisation in West Germanv," 68.
32
Public ownership was concentrated mostly in banks, utilities, auto
production, the crisis industries of coal., steel and shipbuilding, as well as in
research and development labs. It is important to note that this expansion of
the public sector was not part of an overall nationalization plan of the SPD.
Instead, it was a product of the strategic calculations of the individual public
enterprises themselves with respect to their acquisitions policies.
Nevertheless, the perceived bloating of the public sector, combined with the
rise to power of the conservative CDU-CSU/FDP government in 1982,
provided the impetus for another major privatization initiative
A second major program of privatization was drafted by Finance
Minister Gerhard Stoltenberg in 1984 shortly after the election of the CDUCSU/FDP Kohl government. The guiding principle of the government was
essentially a restatement of Article 65 of the Btindesliauslialtsordung, which
states that the federal government can oly have a stake in a private company
if a federal interest exists and the most efficient way to serve it is through state
ownership. A 1983 government report asserts:
"State activities are to be concentrated on true public tasks; those
public services which the private sector can perform more
efficiently are preferably to be handed over to private firms; and
those parts of State assets are to be privatized where it can be
done without infringement of the public interest.1166
Stoltenberg's plan included the partial sale of the government's stake in
Lufthansa, which at that time amounted to approximately 809%.Table 22
outlines the other firms considered in Stoltenberg"s plan. This proposal
initiated a ten vear process which illustrates the many political hurdles to
privatization in Germany. An important parallel history to the evolution of
the public sector in Germany, however, was the evolution of Lufthansa itself.
Symptomatic of developments in the public sector through history, Lufthansa
was originally under tight state control as an important strategic industry, and
was gradually privatized until the final share sale in 1994. Its history is an
important part of the privatization story, as it illustrates the original strategic
and industrial policy grounds for nationalization, and then how changes in
661ahreswirtschaftsbericht
der Bundesregierung, Bundestags-Drucksache
1983 (Bonn, 1983), P. 11.
92400, 27 January,
33
the global market eroded these traditional ustifications for substantial state
involvement.
2J3 A Brief History of Deut5che Lufthansa AG
The first German airline, Deutschen Luftreederei (DLR), was founded
in 1919, and was just the first of many small carriers which emerged in the
1920s, all heavily supported by the Reichsverkehrsministerium.67 The
original idea of consolidating the many smaller carriers into a national airline
was first conceived by the director of the Luftfahrt Abteilung at the
Reichsverkehrsministerium,Ernst Brandenburg, and supported by Deutsche
Bank's Dr. Kurt Weigelt. Both believed that the global airline competition
was an important arena for national interests. Accordingly, Deutsche Luft
Hansa AG was founded on January 6 1926 with original capital of DM 50,000,
the product of a merger between two principal carriers, Aero Loyd (from
whence the crane symbol was borrowed) and Junkers Luftverkehr AG (from
whence the colors were borrowed). Its original mission statement reflects the
industrial policy goals of the German government at that time:
1) to link Germany with the important European markets;
2) to link the important cities of Germany to the European flight network;
and
3) to bring Germany into contact with important trading partners outside of
Europe.
Two years later a freight subsidiary, Condor, was founded, and within ten
years Lufthansa (as it was renamed in 1933) was a major global passenger,
freight and post airline with links to all continents. With the rise of ti-KINazi
regime, however, Lufthansa was slowly overtaken by military interests, and
67Fo a colorful and detailed history of Lufthansa and the German air inclustry generally, see
Rudolf Braunburg, Kranich in der Sonne: Die Geschichteder Lufthansa (Municb: Kindler'
Verlag GmbH, 1978). For general background on the evolution of the European and
international air traffic industrv, see Vicki K. Golich, "Liberalizing nternational Air
Transport Services," in Dennis J. Gavle and Jonathan N. Goodrich, eds., Privatization and
Deregulation in Global Perspective (New York: Quorum Books, 1990): 156-176; Betsy Gidwitz,
The Politics of InternationalAir Transport (Lexington, MA: Lexington Books, 1980).
34
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1,
became a virtual appendage of the Ltiftwaffe once World War II began.68 It
flew its last route in early 1945, and then shut down operations and went into
liquidation.
During the immediate post-War period, the prospect of an
autonomous German airline was out of the question. In 1953, however, a
company called LUFTAG was created to explore the possibilities of, and
necessity for, a German domestic airline-69 The starting capital of DM 6
million (for LUFTAG) came from the federal government, the Bundesbahn
and the Land Nordrhein-Westfalen. Accordingly, at that time the entire
board of directors was comprised of government ministers, as well as the
head of the Bundesbahn, who made sure that Lufthansa did not seriously
compete with rail travel to and from frequently-traveled routes.
Once the feasibility for such a firm was determined, and permission
granted from the occupying powers, LUFTAG set about purchasing planes
and hiring cockpit and ground personnel. On August 6 1954, it was renamed
Deutsche Lufthansa AG, and its first flight from Hamburg to DUsseldorf took
place in spring 1955 only by special exception to the allied command's ban on
autonomous German air traffic. Oy in May, 1955 did Germany receive its
full air sovereignty back from the allied command. The starting capital for
Deutsche Lufthansa AG was DM 50 million, with the federal government
holding a 85.44% share.
It was critical that Lufthansa was organized as a private stock
corporation. As such, the company has a fiduciary duty to its stockholders, as
in the Uited States, to maximize the value of their assets. As the dominant
shareholder, the government could focus on other goals besides profitmaximization, yet this legal form allowed Lufthansa to avoid substantial
transformation costs when privatization was ultimately considered in the
1980s and 1990s. This was not the case for the Bundesbahn, Deutsche
Telekom, or other public-law companies, which first had to restructure the
legal relationships between employees, management, and owners, before
proceeding with privatization. Figure 21 illustrates the standard
privatization process for public-law companies. Fortunately, Lufthansa
68Lufthansa was used as a vehicle to escape the constraints for the Versailles Treaty with
respect to a German air force. For example, pilots would be trained at Lufthansa education
centers, and research and development on fighter planes was undertaken within Lufthansa. See
Braunburg, Kranich in der Sonne: Die Geschichteder Luffhansa
69Braunburg, Kranich in der Sonne: Die Geschichte der Lufthansa .
36
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37
avoided the corporatization phase which is normally required for many
privatization.
Despite the fortuity that Lufthansa was organized as a private-law
company, from the beginning, Lufthansa employees were insured by the
Versorgiingsanstalt des Bundes und der Under (VBL). This institution
insures employees in public enterprises as if they were official Beamte (civil
servants), meaning a relatively more comprehensive and costly pension and
insurance plan was offered to all employees of Lufthansa. To remain insured
by the VBL, Lufthansa had to satisfy the following three covenants of the
VBL:
1) the goverrunent's share of the enterprise must not fall below 50%;
2) the firm remains active in a sector which serves the public interest;
and
3) the firm had to conclude collective wage agreements with its
employees.70
The VBL issue was to become the key hurdle to privatization in 1994, and will
discussed at length below. It is nevertheless important to highlight at the
outset the particular legal structures which were created when Lufthansa was
founded, as they shaped subsequent developments.
In the years following the re-emergence of Lufthansa, the
government's stake in the carrier stayed significantly above 50%,
guaranteeing the state substantial influence over major strategic planning.
Table 23 documents the evolution of Lufthansa's subscribed capital.
Consistent with privatization in Germany generally, the governments stake
was always reduced step-by step, and occasionally increased to a higher
percentage. At the time of the rise of the Kohl administration in 1982, the
federal government held a 74-31% stake in Lufthansa, and when added to the
stakes held by various Under, the Bundesbahn, and other federally-held
enterprises, Lufthansa was, in effect, 80% publicly owned. It is within this
context that the first attempt to significantly reduce the government's holding
was made by Finance N1inister Gerhard Stoltenberg in 1984-85.
7ODiscussedin "Lufthansa Hintergrund: Lufthansa und die VBL," Deutsche Lufthansa AG, 6
July, 1994.
38
Table 23: Development of Lufthansa's Subscribed Capital
Approval of General
Shareholder's
Capital Increase Subscribed Capital
Meeting
6-jan-53
16-Nov-53
(DM Million)
19
25
8-Aug-54
25
50
4-Oct-55
30
80
4-Dec-56
27-Oct-59
12-Dec-60
20-Jul-65
8-Aug-73
29-jun-78
40'
120
60
180
8-jul-87
300
1200
14-Jul-88
6.5
313.5
1206.5
1520
6
1526
382
1908
5-jul-89
4-jul-90
6-jul-94
(DM Million)
6
70
250
150
400
200
600
300
900
Share of Fed.
Government
(DM Million)
4.5
21.125
42.721
57.853
89.962
146.306
213.128
297.257
445-886
668.829
784.612
784.612
784.612
784.612
680.765
Share of Fed.
Goverrunent
(per cent)
75%
84.50%
85.44%
72.32%
74.97%
81.28%
85.25%
74.31%
74.31%
74.31%
65.38%
65-03%
51.62%
51.42%
35.68%
Source: Deutsche Lufthansa AG, 1995
2-C The First Privatization Atteml2t: 1984-1989
When the Kohl administration won its first election since coming to
power in Die Wende of 1982, monetarism appeared to have emerged as the
dominant policy approach in Europe. Beginning with the election of
Thatcher in 1979 and of Kohl in 1983, and confirmed by the conversion of the
socialist government in France to monetarism. in late 1983, the free-market
foundations for European-wide privatization campaigns seemed to be
secure.71 Yet figures from the end of the 1980s indicate that privatization
initiatives varied in their pace and scope (see Table 2.4). While Great Britain
had raised E44.5billion from a plethora of privatizations, Germany had
71For a detailed account of the French retreat from Keynesianism, see Jeffrev Sachs and
Economic Polic 2
.p
y
Charles Wy losz, "The Economic Consequences of President Mitterrand,"
(April 1986): 261-322.
39
received just E3.34 billion. Even traditionally etatist France had raised E8.24
billion during the same period.72 Tracing the evolution of the privatization
of Lufthansa illustrates several institutional obstacles to vigorous
privatization in Germany during the 1980s,thereby explaining these
differences.
In the first two years of the Kohl administration, a coalition of the
center-right CDU/CSU and the free market FDP, progress on reducing the
government's interests in over 900 enterprises was extremely limited.73 A
notable exception was the sale of 13% of the goverrunent's interest in VEBA a
producer of aluminum, chemicals and other energy products, which raised
DM 800 million for the treasury and left the federal government with a 30%
interest in the firm. In 1984, the Kohl government had not expressed
tremendous interest in privatization as a policy priority, nor was
privatization an ideological touchstone for the new government's economic
policy, as it was for the Thatcher administration.74 Nevertheless, Finance
Minister Gerhard Stoltenberg presented a privatization plan to the cabinet in
October, 1984 which included a proposal to reduce the government's stake in
Lufthansa from 79% to 55% (see Table 22).
The details of Stoltenberg's plan reveal less an ideological commitment
to transferring managerial control and ownership to private hands, and more
a desire to raise revenues for the government treasury. As Table 22
illustrates, seven out of the eleven candidates for "privatization" were to
remain under the control of the government, as the state would retain a 0%
share or greater. Moreover, the federal government's stake in Volkswagen
was to be reduced from an already-minority 20% share to a 14% share, while
the strategic 20% stake of the Land of Lower Saxony would remain
untouched. Finally, three other candidates were relatively small enterprises,
two of them subsidiaries of the Bundesbahn, and the government's future
interest in them was unclear. Yet wile the state retained control in many
cases, it nevertheless stood to gain a fiscal boost from its limited sale of shares
72it is important to remember, however, that these differences reflect, in part, the different
starting points of these states. The size of the public sector was significantly smaller in
Germany as compared with Britain or France, see discussion in section 2.A.
73See Robert Fraser, ed., Privatization: The UK Experience and International Trends (Essex,
UK: Longman, 1988);Esser, "'Symbolic Privatisation': The Politics of Privatisation in West
Germanv."
74Peter
L2.
ruce, "Bonn Takes a Step Toward Privatisation,"
Financial Titnes, November 15, 1984,
40
-- the program was estimated to raise DM 2 billion.75 In the sense that the
program could be labeled "privatization" at all stemmed from the intention
of the government to regard ts first sale as the beginning of a continuous
process of state divestment. It was this implicit intention which mobilized
virtually immediate political opposition to Stoltenberg's plan.
Intuitively, one might expect conservative parties in Germany, such as
Table 24: Privatization in Selected OECD Countries 1980-1991
Country
Privatization
period
Accumulated privatization
proceeds absolute
as of average
annual GDP over the
privatization period
(P equivalent)
Austria
1987-90
Canada
1984-90
France
1983-91
FF82.4 billion E8.24 b)
1.50
Germany*
1984-90
DM9.7 billion 0.34 b)
0.50
Italv
1983-91
L13,500 billion (E6.25 b)
1.40
Japan
1986-88
V11,000 billion
(E47.8 b)
3.10
Netherlands
1987-91
FL4.9 billion
(4E1.5 b)
1.00
New Zealand
1987-91
NZ$9.0 billion (0.0 b)
14.10
Portugal
Spain
1989-91
Esc364 billion (0.5 b)
4.30
1986-90
Ptas2O7 billion (fl.2 b)
0.50
Sweden
1987-90
SKr14 billion (0.3 b)
1.20
Turkev
1988-91
TL3,500 billion (CO-3b)
1.60
UK
1979-91
E44.5 billion
11.90
Sch12.7 billion (0.6 b)
C$3.1 billion (I-6
b)
0.9(
0.60
1
* Area of Federal Republic of Germany before unification
Source: Stevens, 1992
the Bavarian CSU, to embrace privatization as a way of subjecting inefficient
state-owned enterprises to the discipline of the market. The reality, however,
is that regional industrial policy interests played a large role in knocking
Lufthansa off Stoltenberg's privatization list in 1984-85.76 Opposition to the
75Bruce, "Bonn Takes a Step Toward Privatisation."
76Bruce,"Bonn Takes a Step Toward Privatisation;" Esser, "'Symbolic Privatisation': The
Politics of Privatisation in West Germany."
41
partial privatization of Lufthansa in 1984 was led by Franz Josef Strauss,
Minister President of Bavaria and head of the CSU. Strauss was a member of
the boards of both Lufthansa and the European Airbus Industrie consortium.
Moreover, a key partner in the Airbus consortium, Messerschmidt B61kowBlohm, was located in Bavaria. Strauss' own personal interests by virtue of
his business positions is mere speculation, yet his public statements reveal his
opposition to the partial privatization of Lufthansa was driven by his fear that
private ownership would result in changes in procurement policies which
would reduce orders for new planes from Airbus.77
Strauss' ability to engineer the removal of Lufthansa from Stoltenberg's
list of privatization candidates in 1985 illustrates the institutional hurdles to
effective privatization programs in Germany. Two critical institutional
constraints are the need for compromise among the members of the ruling
coalition, and the division of policy-making power between the federal
government and the Linder according to Germany's particular brand of
federalism. Beyond his adamant opposition within the cabinet itself (Strauss
managed to delay consideration of Stoltenberg's proposal for quite some
time), Strauss threatened Bavarian-led resistance in the Bundesrat, should
the plan reach that stage in the approval procesS.78 As the 1993 Solidarity Pact
illustrates, the consensual features of cooperative federalism have, in fact,
been enhanced by unification, preserving the power of the Bundesrat veto
(and, by extension, the threat of exercising that veto).79 Despite later
assurances by Stoltenberg that the state would retain managerial control with
a 550%stake in Lufthansa, with 15% of the state's previous holding to be sold
to the public and 10% to a newly created holding company controlled by
industry leaders, Strauss' opposition defeated the first attempt by the Kohl
administration to reduce its stake in Lufthansa.80
Strauss forcefully documented his adamant opposition to the idea of
privatizing Lufthansa in August, 1985, in a letter which was leaked to the
77Strauss was also angered by the apparent policy reversal of Kohl himself, who had
apparently earlier pledged not to disturb the federal government's stake in Lufthansa. See
Bruce, "Bonn Takes a Step Toward Privatisation."
78Bruce, "Bonn Takes a Step Toward Privatisation."
79Razeen Sally and Douglas Webber, "The Solidaritv Pact: A Case Study in the Politics of
Unified Germany," Gernan Politics,31 (April 1994): 18-46.
8OPeter Bruce, "Lufthansa Escapes Plan for Part Privatisation," FinancialTilnes, March 22,
1985 1; Rupert Cornwell, "Strauss Scuttles Plans to Sell Off Part of Lufthansa," Financial
Titnes, September 21, 1985,1:2.
42
press.81 I-Eschief objection was, as he made clear during the debate on
Stoltenberg's plan, the potential for private management to direct purchases
away from Airbus. Significantly, he mentioned that purchasing policy should
remain the responsibility of the government, and not the market, due to the
fact that aircraft sales "had virtually nothing any longer to do with fair
competition."82 Strauss' comment reflects the view that market competition,
at least in the airline industry, may not guarantee allocatively efficient and/or
distributionally acceptable economic outcomes. T1rdsillustrates a core debate
surrounding the original justification for state ownership and its continuing
validity. As discussed in section 2A, the public sector was always accepted by
both major parties as an essential part of the economy. Public enterprises
were active in two main spheres. The first was in sectors of the economy,
such as telecommunications, which have traditionally been considered either
natural monopolies or industries tending toward oligopoly. Government
involvement was therefore justified to protect consumer interests. The
second sphere was in sectors wich were considered important to national
industrial policy: crisis industries such as coal, steel or shipbuilding; energy;
and transportation. The airline industry, due to its strategic military heritage,
is a sector with traditionally high levels of state involvement. In 1985, most
major European airlines, including British Airways, were owned and
controlled by the state, Add to this the fact that the EU was still in its
dormancy, and that international competition in air travel was muted by
strict control over domestic markets and bilateral agreements regulating
travel between individual states, and Strauss' fears become more plausible.
While Strauss' opposition was both necessary and sufficient to scuttle
the original plan to reduce the government's stake in Lufthansa, his was not
the only dissenting voice with respect to the government's privatization plan.
On the one hand, Under governments stubbornly refused to part with their
own stakes in such enterprises, and opposed attempts to privatize regional
development banks due to concerns over possible changes in favorable
lending policies to regional enterprises and farms.83 This was particularly the
case with the proposed privatization of DSL. The Land government of Berlin
also opposed the plans to privatize DIAG due to the potential employment
81Comwell, "Strauss Scuttles Plans to Sell Off Part of Lufthansa."
82Quoted in Cornwell, "Strauss Scuttles Plans to Sell Off Part of Lufthansa," 12.
8383Bruce, "Bonn Takes a Step Toward Privatisation."
43
effects of a planned rationalization program under private ownership and
control.
On the other hand, unions for the most part also opposed
privatization. The proposal to reduce the federal government's 20% stake in
Volkswagen would have shifted the balance on the Aufsichtsrat in favor of
management interests, and thus provoked fierce union resistance. Moreover,
officials at the two main unions at Lufthansa -- the Gewerkschaft Offentliche
Dienste, Transport und Verkehr (OTV, representing 15,000 blue-collar
workers), and the Deutsche Angesteilten-Gewerkschaft (DAG, representing
5,000 cockpit, cabin and technical crew-members) -- were always opposed to
privatizing Lufthansa due to their own interests in high wages and benefits,
job security, and their conviction that air traffic, as a critical element of
infrastructure, was a fundamentally public sphere.84 Officials at OTV stated
that they were concerned, upon studying the effects of liberalization and
deregulation in the United States, about the possible reduction in service to
rural areas, as well as possible broader negative effects for regional economies.
In sum, the opposition of regional interests, channeled through institutions
conducive to blocking major privatization initiatives, lead to the cancellation
of the government's plans to partially privatize Lufthansa in 1985.
Although Strauss was able to defeat plans to sell 'the government's own
shares in Lufthansa, it proved more difficult to oppose the government's
decision not to participate in a planned capital increase at Lufthansa in 1987.
According to German securities law, any capital increase must be offered to all
present owners of stock, who then have the option to either subscribe for
additional shares or not to participate in the new issue.85 In 1987, Lufthansa
approved a capital increase and the government decided only partially to
participate.86 By not participating in the issue, the federal government's share
84interviews, with officials at OTV and DAG, February and March, 1995.
85See sections 186 and 187 of the German Aktiengesetz (AktG). Each shareholder receives a
Bezugsrecht a form of option, allowing her to purchase enough shares in the capital increase to
maintain her present share. Bezugsrechte can also be sold on a secondary market. The
transferability of Bezugsrechte is thus important for the goverrunent, as their sale can raise
monev while simultaneously reducing the government's share in the public enterprise, all the
while'retaining the present urrtber of government shares, to be sold later when the share prices
may be higher.
86Haig Simonian, "State Share in Lufthansa to Fall," Financial Times, May 20, 1987,1:34;
Andrew Fisher, "Lufthansa Share Sale Attacked," Financial Times, JuIv 4 1987, :10; Haig
Simonian, "Privatisation 5; Impediments to Rapid Progress," Financial'Times,September 16,
1987, Survey, p V.
44
was to fall from 75% to 65%.87 In an intriguing move, however, the
unsubscribed portion of the federal government's share was purchased by two
Bavarian banks -- Bayerische Landesbank Girozentrale, partly owned by the
Land's savings banks association; and the Bayerische Landesanstalt ffir
Aufbaufinanzierung a Land-owned credit institution. This transfer of state
control from the federal to the Land level brought intense criticism from the
free-market FDP, who argued that the transaction not only failed to forward
the privatization of Lufthansa, but actually created further obstacles to later
privatization by granting the Bavarian government a strategic 5% share in the
enterprise.88 Two years later, however, the federal goverrunent's stake was
significantly reduced in a second capital increase in which the government
refused to participate. The DM 300 million issue, appropriately conducted
one year after Strauss' death, diluted the federal government's share from
65% to 51% (55% including shares held by the Bundesbahn and other federal
agencies).89
By the end of the 1980s, some progress had been made to reduce the
overall holdings of the federal government. Although these efforts were
neither as large nor as wide spread as those in Britain, the number of public
enterprises declined from 958 in 1982 to 337 in 1989-90As in the case of
Lufthansa, however, much of the divestment was not total. Rather, the
government retained a strategic stake in many public enterprises.
Accordingly, scholars such as Esser have labeled the German privatization
program of the 1980s as "symbolic privatization."91 While the government
could point to significant successes, such as the sale of VEBA, IVG and VIAG,
and while some failures such as the sale of the government's stake in
Volkswagen were due to international factors beyond the control of the
government (in that case the stock market crash of 1987 and the revelation of
foreign exchange fraud at Volkswagen), observers were generally
87Such a technique has been called "hidden privatization," just as the purchase of shares in
such an increase is called "hidden subsidization," the most recent example being Air France in
1993.
88Fisher, "Lufthansa
Share Sale Attackeci," I:10.
89David Goodhart, "Bonn May Consider Sale of its Holding in Lufthansa," Financial Times,
November 29,1990,1:30. The federal government received DM 98.4 million from the sale of its
Bezugsrechte during this issue. Knauss, Privatisienings- und Beteiligungspolitik in der
Bundesrepublik Deutschland , p. 156.
9OKnauss, Privatisierungs- und Beteiligungspolitik i der Bundesrepublik Deutschland 147.
91Esser, Germany: Symbolic Privatizations in a Social Market Economy;" "'Symbolic
Privatisation': Th Politics of Privatisation in West Germany."
45
disappointed with the decided lack of zeal with which the government
pursued privatizations
In the government's defense, however, the size of
the public sector in Germany was not great to start with. Moreover, there was
no apparent need for the government to undertake a massive privatization
initiative; Firms such as Lufthansa were largely successful and relatively
independent of governmental micro-management. Absent significant
budgetary crisis or public outcry against the public sector, there was simply no
compelling political or economic reason to push an aggressive privatization
program through a series of formidable institutional obstacles and against
significant oppositions This environment changed radically in 1990 with
unification, and this ushered in a new chapter in the history of Lufthansa
privatization.
2-D Unification and the Second Attemj2t at Privatization: 1990-199494
In late 1990, Finance Minister Theo Waigel (a leader of the Bavarian
CSU) announced that a new privatization campaign would harbor "no
taboos" with respect to which public enterprises would be considered for
possible privatizations
In reference to the federal government's stake in
Lufthansa, Waigel replied that the sale of the state's share was oly a matter
of "practicalities such as timing and share price.1196 To explain the reasons for
the successful privatization of Lufthansa in 1994 I will first explore why the
government was able to overcome traditional obstacles to privatizing
Lufthansa Second, I will examine the internal restructuring at Lufthansa
which was essential to the "timing and share price" Waigel referenced in
1990. The privatization issue was successful due to the convergence of
government iitiative and the perceived corporate health of Lufthansa.
Without either of these elements, divestment would not have occurred.
92Seee.g.,GerhardFels,
"No Time to Back Awav from Revitalization:
Economv " Financial Times, December 16, 1987, L 7.
The West German
93Thanks'to Professor Josef Esser, who discussed this point in an interview in Frankfurt (March,
1995).
94The discussion of the 1990-94 privatization initiative is largely based on several interviews
conducted in Germany in February and March, 1995. A list of the officials interviewed is
included as Appendix A.
95Goodhart, "Bonn May Consider Sale of its Holding in Lufthansa." Significantly, Waigel
refused at that time to consider the possible privatization of Deutsche Telekom.
96Goodhart, "Bonn Mav Consider Sale of its Holding in Lufthansa."
46
2-D-i Changes in the Domestic and International Enmironment: Erod'
Traditional Political Qpposition
As discussed above, the primary reasons for the failure to privatize
Lufthansa in 1985 were: 1) divisions within the ruling coalition; 2 the
opposition of regional interests based upon the protectionist nature of the air
transport industry at that time; and 3 the simultaneous existence of relatively
low public sector debt levels and the robust financial health of Lufthansa In
the early 1990s, each of these sources of opposition were eroded by important
domestic and international developments. With respect to the federal
government, two important shifts were central to the renewed interest in
privatizing Lufthansa. The first major shift was the new pressure placed on
the budget due to unification, while the second was the fundamental change
in the international air transport industry due to globalization.
2.D.i.a Unification and the Liqgidity Crisis
An extensive discussion of the economic and political complexities of
German unification is well beyond the scope of this study-97 The aspect of
unification which was central to the Lufthansa privatization story was the
rising level of the government deficit caused by massive transfer payments to
eastern Germany. While few expected the transition from a command
economy to a market economy to be an easy and quick process, the problems
encountered during the unification process were more extensive and
intractable than many first anticipated. These problems were exacerbated as
western Germany slid into recession in 1992-93. The resulting drain of public
sector funds rendered the federal government on one hand in need of funds
97A few of the many works on this subject include: Hans-Werner Sinn and Gerlinde Sinn,
Jumpstart: Te Economic Unificationof Germany (Cambridge, MA: MIT Press, 1992); Ullrich
Heilernann & Reirnut Jochimsen, Christmas in Jly? The Political Economy of German
Unification Reconsidered(Washington, D.C.: Brookings Institute Occasional Papers, 1993);
Michael G. Huelshoff, Andrei S. Markovits and Simon Reich, eds., From Bndesrepublik to
Deutschland: German Politics After Unification (Ann Arbor, MI: U Michigan Press, 1993); Peter
H. Merki, German Unification in the European Context
University Park, PA: U. Pennsvivania
Press, 1993);Christopher Anderson, Karl Kaltenthaler and Woligang Luthardt, Te 6omestic
Politics of German Unification (Boulder, CO: Lynne Rienner Publishers, 1993).
47
in order to counteract the growing deficit, and on the other hand incapable of
granting substantial funds to existing public enterprises such as Lufthansa.
As the OECD Survey of Germany reported in 1994, unification caused a
tremendous shift in Germany's public finances-98 Through a commitment to
tight monetary policy and restrained fiscal policy, Germany managed to
balance its budget by the end of the 1980s. Massive transfers to eastern
Germany in the wake of unification, averaging 4 to 5% of west Germany's
GDP annually, quickly erased these fiscal gains. The general government
balance (federal, state and municipal) shifted from a modest surplus in 1989 to
a deficit which equaled 33% of GDP in 1993.99 (See Table 25) Although this
figure still lagged behind many other OECD states, if such a deficit level
lingered over time, the debt/GDP ratio would not meet Maastricht criteria.
Beyond such potential dangers, however, was the simple fact that such deficit
levels were grossly abnormal by German standards.
The financial burden on the federal government increased further as a
result of the 1993 Solidarity Pact-100 Before 1993, transfer payments from west
to east Germany were funded in part through the floatation of bonds by the
German Unity Fund. The Solidarity Pact was designed to end this program by
integrating the new Ldnder into the normal revenue-sharing scheme already
in place among western Ldnder. The burden of funding this transition,
however, was placed primarily on the federal government, as the share of the
VAT given to the Ldnder was increased from 37% to 449%,effective in 1995.
This funding increase was in addition to continued direct transfer payments
from the federal government to the new Ldnder, detailed in Table 26.
980ECD EconomicSrveys: Germany (Paris: OECD, 1994), see especially section Ill.
"The OECD report argues, however, that the increase in the deficit in i993 was main1v due to
cyclical factors. While the structural deficit (cyclicaliv-adjusted) deficit has been reduced,
this is mainly due to sharp restrictions on the growth oi public spending. In its conclusion, the
OECD argues for more vigorous privatization and deregulation initiatives. See OECD Economic
Surveys: Germany, 119-123.
10ORazeenSaliv and Douglas Webber, "The Solidarity Pact: A Case Study in the Politics of
Unified Germany;" OECD EconomicSurveys: Germany, 60-61.
48
Facing rising deficits due to increasing obligations in eastern Germany,
and recognizing that the transition there would require much more time and
funding than originally anticipated, the federal government was obviously
under great pressure to raise revenues and reduce expenditures in the early
1990s. Given Kohl's election pledges to reduce the corporate tax burden in
order to attract investment flows into Germany, privatization offered a
Table 25: German Federal Budgets (DM billion)
E=enditure
A
(As a
of GDP)
1991
1992
13-00
1990
380.20
15.70
401.80
14.30
427.20
14.10
1993
457.50
14.70
480.00
14.90
82.20
32.10
8.00
167.50
85.60
34.20
8.50
252.00
91.80
39.60
11.00
259.40
95.50
43.80
13.80
274.10
94-50
45.80
12.50
304.70
93.50
52.80
13.20
320.50
37.60
129.90
40.50
211.50
64.90
194.50
78-00
196.00
81.90
222.80
101.90
218.60
269.70
12.10
332.10
13.70
348.60
12.40
387.80
12.80
390-50
12.60
410.30
12.70
247.10
22.60
276-00
56.00
317.90
30.70
352.90
34.90
356-00
34.50
375.20
35.10
-20.10
-0.90
-48.00
-2.00
-53.20
-1.90
-39.30
-1.30
-66.90
-2.20
-69.70
-2.10
-49.70
-2.00
-90.90
-3.20
-78.50
-2.60
-101.80
-3-30
-95.50
-2.90
1989
289.80
1994
of which:
Consumption
Interest Payments
Investment
Transfers and lending
of which:
To other administrations
Others
Revenues
(As a % of GDP)
of which:
Taxes
Others
Financial Balance
(As a % of GDP)
General government balance*
(As a of GDP)
* = including Lander and municipal governments
Source: OECD, 1994
vehicle through which the government could raise money through
divestment without tax increases. The government would also save money
by avoiding the subsidy or rescue of ailing public enterprises-101 Ufication
101Another important advantage of major privatization initiatives is their abilityto attract
international capital to domestic exchanges. This was particularly important for 6ermany for
three major reasons: 1) the shortage of liquidity from both the government and the major anks
due to the demands of unification; 2 the attempt by the government to construct "Finanzplatz
49
had thus re-opened the debate surrounding the continued justification for
certain public assets, particularly holdings in private-law enterprises such as
Lufthansa. In late 1990, the Bundesbank stressed the need to reduce the
deficit, highlighting privatization as a particularly attractive policy-option.102
While pressures on the federal budget were driving the Kohl administration
toward a more aggressive privatization policy, other international
developments were simultaneously eroding the regional industrial policy
interests which previously blocked the 1984-85 initiative.
Table 26: Public Sector Transfers to eastern Germany (DM billion)
1991
1992
1993
1994
140.00
152.00
169.00
178.00
Other
75.00
5.00
31-00
4.00
25.00
89-00
5.00
24.00
5.00
29.00
116.00
10.00
15.00
5.00
23.00
127.00
14.00
5.00
6.00
26.00
2. Receipts
33.00
37.00
39.00
42.00
31-00
2.00
35.00
2.00
37.00
2.00
40.00
2.00
107.00
115.00
130.00
136.00
3.80
4.10
58-00
3.80
4.10
49.00
4.20
4.60
47.00
4.20
4.70
44.00
1. Gross transfers
Federal government transfers to the
eastern Ander and communities
Wester lnder and communities
German Unity Fund borrowing
Transfers from EC
of which:
Federal tax receipts from the east
Federal administrative receipts from the east
3. Net transfers ( - 2)
As a percentage of:
All-German GDP
Western German GDP
Eastern German GDP
Source: OECD, 1994
Frankfurt" as a major European financial center in the EU; and 3) the shaken confidence in the
traditional German corporate governance structures in the aftermath of the Schneider and
Metalgesellschaft scandals. See discussion in section 2.D.v.
102Andrew Fisher, "Unity Sparks Debate Over State Assets," Financial Times, January 8, 1991,
Survey, p. XIV. The federal government also conducted an internal audit of its holdings to
identify potential privatization candidates. See Bundesminister der Finanzen, Bericht des
Bundesininsters der Finanzen zur "Verringerung von Beteiligungen und Liegenschaften des
Bundes (Bonn: Ministry of Finance, 13 July,
1 1992).
50
2.D.i.b Global Pressures in the Air Transl2ort Industry
The airline industry has traditionally been under the tight control of
nation-states due to its importance for security and industrial pliCy.103 Since
its beginnings, passenger and cargo traffic has been regulated by bilateral
agreements between states-104 Beginning in the 1960s, the demand for air
travel increased dramatically, averaging 14.4% annual growth through
1980.105 Despite this growth in demand, profit margins for carriers were
increasingly squeezed because of overcapacity and the distortions of regulated
traffic, which undermined potential gains from economies of scale and scope
on international routes. These regulatory distortions are usefully categorized
into four main areas:106
• Bilateral restrictions on entry, capacity, traffic, fares and routes;
• Domestic regulatory policies such as safety regulations, taxation and
limits on entry and domestic traffic;
o Ancillary market restrictions on computerized reservations systems
(CRS), or monopolistic provision of airport facilities or services; and
o State-ownership and subsidization
Lufthansa, like other carriers during this period, benefited from a
protected domestic market, state subsidies, and a contractually guaranteed
103Acomplete discussion of the evolution of international air transport is clearly beyond the
scope of this studv. For interesting and informative examinations of this history, see OECD,
International Air Transport: The Challenges Ahead (Paris: OECD, 1993); Vicki K. Golich,
"Liberalizing International Air Transport Services, 156-176;Francis McGowan and Paul
Seabright, "Deregulating European Airlines," EconomicPolicy October,1989): 283-344;Daniel
M. Kasper, Deregidation and Globalization: Liberalizing International Trade in Air Services
(Cambridge, MA: Ballinger Publishing Co., 1988); Gidwitz, The Politics of InternationalAir
Transport
104,ajthough the United States attempted to construct a liberalized global traffic system in
1944 at the Chicago Convention, traditional national interests in protecting domestic markets
prevented such an order from being established. As a result, the international airline industry
was based on the sovereignty principle, whereby all traffic was regulated by bilateral
agreements, such as the Bermuda Agreements between the United States and Great Britain.
Airlines became important symbols of national pride and technological preeminence, and were
frequently used as tools of industrial policy. Even the comparatively liberal United States
heavilv subsidized the creation and expansion of Pan American Airlines in the 1960s. These
psychological and economic factors are more important than fading national security concerns
with respect to lingering protectionism in the airline industry.
1050ECD, International Air Transport: The Challenges Ahead
106GOlich,"Liberalizing International Air Transport Services," 156-176; Kasper, Deregulation
and Globalization: Liberalizing International Trade in Air Services 25.
51
percentage of traffic on important international routes, particularly to North
America. Although these percentages, and the fares its was allowed to charge
passengers and cargo clients, were fixed either by the federal government or
by bilateral agreements, they were sufficient to insulate the carrier from
competitive pressures to increase efficiency. These conditions changed
dramatically as a result of airline deregulation in the United States, which
intensified international competition just as the global airline industry began
to liberalize.
Deregulation in the United States (beginning in 1978) transformed the
nature of competition in international travel.107 These developments had
two main implications for the airline industry in Europe, and for Lufthansa
in particular. First, as the domestic market became saturated in the Uited
States, thereby squeezing profit margins, intense competition shifted to
lucrative international routes, thereby "exporting" competition to
international markets.108 Second, the American experience provided
European policy-makers with an example of how deregulation could affect
the European market, even acknowledging numerous differences between
the European and American markets, such as alternative means of travel
between cities (for example, high-speed trains and the Channel Tunnel).
Thus, while the demand for passenger travel continued to grow 6 to
7% annually in the 1980s, profit margins continued to shrink due to
increasing competition for international traffic. While Lufthansa and other
107Brieflvsummarized, deregulation in the American airline industry resulted in four main
changes in the market: 1) ticket prices fell; 2 the number of routes increased; 3 after a brief
increase in the number of caff iers, there was a massive consolidation of carriers into a few major
players; and 4 discriminatory pricing and development of the hub-spoke system limited
service to rural destinations and established high barriers to entry for new firms. Golich,
"Liberalizing International Air Transport Services," 156-176;Francis McGowan and Paul
Seabright, "Deregulating European Airlines," 283-344. Concentration and the exercise of
market power comes about due to several market and technological factors. Advanced
computerized booking systems allow for efficient routing of passengers and for the automatic
fare distribution of passengers on flights which garantee the maximum possible profit from
each flight. The start-up costs for such systems are enormous, and further gains are possible
through international coordination. Moreover, due to infrastructure limitations, docking space
at most airports (owned by individual airlines) is limited. These market realities pose
formidable barriers to entry for new fin-ns, and benefit the large firms able to take advantage of
economies of scale and sunk costs with respect to computer systems and the purchase of landing
space. See generally, Paul Betts, "Survey of Business Locaiions in Europe," FinancialTimes,
September 27, 1994, urvey p 111Emma Tucker, Flying the Flag Crowds the Air: The Problem
at the Heart of Airline Competition," Financial Times, ulv 29, 1994 12.
108Kasper, Deregulation and Globalization: Liberalizing nternational Trade in Air Services
state-owned carriers were mostly protected from such competition, experts
believed that global liberalization in air transport would lead to a market
where a few "global players" would accommodate virtually all international
traffic, while inefficient carriers would be priced out of the market.
Accordingly, Lufthansa was pressured by "first-movers," like British Airways
(privatized in 1987),who diverted a substantial amount of international
traffic to their home markets. Even as fare setting and route selection was
liberalized, protected domestic markets meant that carriers could exploit
barriers to entry, such as restricted access to landing spaces, the high costs of
developing computerized reservation systems (privileging carriers displayed
on initial option screens), and sunk infrastructural investments in new
planes and equipment. Moreover, British Airways and American carriers
benefited from lower personnel costs relative to Lufthansa. These pressures
pushed Lufthansa and other carriers to build international alliances, which
benefited participants by spreading investment costs and opening access to
previously restricted markets.
Parallel to these developments was the re-emergence of the EC in 1985
and the subsequent activities of the Commission to liberalize air transport
within Europe-109 A three stage program was designed to loosen restrictions
on fares, routes, and market accesswithin Europe -- with an open market for
air travel planned for 1997. Significantly, the European Court of justice struck
down the EC competition policy exemption for European carriers with respect
to fares in the Nouvelles Frontieres case in 1986. The ability for European
carriers to set up branch offices in any Member State threatened even
traditionally protected domestic markets, and made international traffic even
more important for Lufthansa. Due, in part, to the government's
privatization plans, Lufthansa joined the German government in its effort to
promote greater liberalization.110 Lufthansa also pushed the government to
109Seegenerally, Francis McGowan and Paul Seabright, "Deregulating European Airlines,"
283-344;Heinz Ruhnau, "Reformkonzepts fdr den Luftverkehr," in Otto Vogel, ed.,
Deregidierungiind Privatisierung (Bonn: Deutscher Instituts-Verlag, 1988): 126-135; Betts,
"Survey of Business Locations in Europe;" Tucker, Flying the Flag Crowds the Air: The Problem
at the Heart of Airline Competition," I:2.
11OAsthese efforts developed, European states became divided into two camps. The first
(consisting of Britain, the Netherlands and, later, Germany) sought complete liberalization
and bitterly opposed state subsidies to ailing airlines which, in their view, were doomed to
failure given the failure to link these subsidies to restructuring, which these states held to be
essential to compete in the international market. The other camp (France, Belgium, Greece and
Portugal) argued that, in the absence of multilateral agreements on air traffic, liberalization
53
negotiate favorable renewals to existing bilateral agreements, especially with
the Uited States.
Increased international competition, primarily from US. carriers,
necessitated both investment in more fuel-efficient aircraft and a radical
restructuring of traditional (mainly state-owned and controlled) corporate
governance structures in order to reduce costs and maximize revenues.
These developments undermined traditional industrial policy justifications
for state-support and protectionism, as investment needs eroded existing
relationships between airlines and aircraft manufacturers by shifting orders
toward more fuel-efficient airplanes. In this way, regional interests, such as
those previously represented by Strauss in the mid-1980s, gradually lost their
empirical bases, and thus their persuasiveness. First-movers who rushed to
embrace streamlined corporate structures and negotiate global alliances
clearly had advantages in the global market. In sum, increasing global
competition from low cost carriers pressured Lufthansa to reduce costs, to
reorganize corporate decision making to enhance flexibility, and to seek global
partners to expand route networks and share operating costs. Vanishing
protection for its domestic market, via EU liberalization, intensified these
pressures. Global recession in the early 1990s triggered the first downturn in
the international air traffic market, further exacerbating competitive
pressures (see Table 27). Thus, Lufthansa's restructuring campaign in
response to these pressures was an essential precondition to privatization.
2-D-ii The Reluctant Candidate: The Poor Financial Hgalth of Lufthansa in
the Earl
Ironically, just as the government embraced the privatization of
Lufthansa with renewed vigor and greater determination, the poor financial
health of Lufthansa precluded a quick and profitable sale of the federal
only benefited those states which had concluded lucrative bilateral arrangements with the
United States, such as Britain and Germanv. In the alternative, these states conceded that
globalization necessitated both the rationalization and eentual privatization of state
carriers, as old industrial and military justifications for state-ownership had faded away, but
maintained that "one-time, last-time" subsidies were necessary to rehabilitate their troubled
airlines in order to prepare them for privatization. In 1994, Britain filed suit in French courts
opposing the subsidization of Air France as a violation of EU competition law. See "London
klagt gegen die Air France. Wegen Wettbewerbsverzerrung clurch Milliarden-Subventionen,"
SUddeutscheZeitung, October 5, 1994 (Wirtschaft section).
54
government's shares. Three principal factors were responsible for the
financial crisis at Lufthansa: 1) the decline of the world air traffic market; 2)
over-investment in the late 1980s in anticipation of the common market; and
3) relatively high administrative and personnel costs, combined with a large
inherited structure for corporate functions-111
Table 2.7.-Operating Results for Global Carriersand Lufthansa
Net Results for
Net Results for
1ATACarriers
($ million)
Lufthansa
($ million)
1988
1600
61.9
1989
1990
1991
1992
1993
300
-2700
-4000
-4800
-4100
77.5
5.6
-277.5
-233.1
-69.4
Source: Deutsche Lufthansa AG, 1994; Author's calculations
The first source of difficulty for Lufthansa was the decline in the global
air traffic market. Lufthansa's operating results were consistent with the
substantial losses recorded by world airlines from 1990-1993(see Table 27) As
was the case with virtually all other airlines, Lufthansa suffered from overcapacity problems, combined with declining revenues due to intense price
competition for economy-class passengers -- which comprised the lion's share
of the increase in passenger traffic during this time. Competition was
particularly intense on trans-Atlantic routes, where Lufthansa was forced to
reduce its fares up to 36% in 1992 to compete with lower-cost American
competitors.112 The weakness of the dollar during this time also damaged
Lufthansa's performance, costing the carrier an estimated DM 100 million
111See Lufthansa AG, 1993 Annual Report (Kbln: Lufthansa AG, 1994); Lufthansa AG,
International Offering Circular (Kbln: Lufthansa AG, 1994); Christopher Parkes, "Lufthansa in
Cost-Cutting Plan as Privatisation Looms," FinancialTimes, August 14, 1992,1:16; Fisher,
"Unity Sparks Debate Over State Assets;" Christopher Parkes, "Ready for Take-off: The
Share Issue by Germany's Lufthansa," FinancialTimes, September 20, 1994, 20.
112Parkes' "Lufthansa in Cost-Cutting Plan as Privatisation Looms." Combined IATA losses on
international traffic between 1990 and 1993 amounted to almost 16 billion. Experts identified
the 1991Gulf War and the international recession as the primary causes for the downturn.
Lufthansa AG, International Offering Circular.
55
annually.113 Finally, the downturn in the Germany economy after
unification also reduced demand for both business travel and cargo delivery.
A second major factor in the financial crisis facing Lufthansa in the
early 1990s was over-investment in the latter half of the 1980s, particularly in
new aircraft and route expansion in eastern Europe and Asia. Increases in
administrative personnel and investment in over 120 new aircraft caused
Lufthansa's net debt to skyrocket to DM 6 billion. While payroll costs rose
371%between 1989 and 1992, productivity increased by just 7.114 Financial
journalists reported that misplaced optimism over the completion of the
common market had "'tempted the board into an unprecedented spending
spree."115 Although the chairmen during ts period (Heinz Ruhnau and
Herbert Culmann) have been criticized for managerial incompetence and
poor judgmental their earlier misjudgments returned to benefit Lufthansa
as current chair JUrgen Weber inherited one of the most modern fleets of any
international carrier, as well as an extensive network in eastern Europe and
in Asia (particularly Beijing).117 Nevertheless, the investment program of
the late 1980s had reduced the carrier's capital quota from 38% in 1989 to
17.9% in 1992 -- that is, Lufthansa was 82.1% in debt.118 Yet a simple capital
increase was difficult for several reasons. First, the poor performance of the
airline precluded wide-spread interest and a high share price for Lufthansa
stock. Second, the government was not in a position to purchase additional
shares or otherwise aid the ailing airline due to the fiscal pressures of
unification. Without government participation, a capital increase would
reduce the federal government's stake below 50%, causing Lufthansa to be
dropped by the VBL, resulting in the loss of employee pensions with no spare
capital to create a new, in-house pension fund.
113Parkes, "Lufthansa in Cost-Cutting Plan as Privatisation Looms," 116. The weakness of the
dollar was also a benefit to Lufthansa, as fuel purchases are commonly made in dollars
(Lufthansa's fuel costs decreased 11.3% in 1994 alone).
114Parkes, "Lufthansa in Cost-Cutting Plan as Privatisation
Looms," 116.
115Parkes, "Ready for Take-off: The Share Issue by Germany's Lufthansa," 20.
116See Karl Heinz Lange, "Kohle fUr den Kranich," Die Wche, May 11, 1994.
1171nterviewwith Ingo Marowsky, OTV, March, 1995.
118Lange,Karl Heinz, "Kohle fr den Kranich." The important implication of this high debt
ratio was the difficulty in obtaining bank credit, the traditional form of industrial finance in
Germany (as opposed to equity issues). Banks were not only reluctant to extend extraordinary
credit due to the capital squeeze of unification, but also due to such scandals as the Schneider
affair. Accordingly, Lufthansa was forced to look to the equity markets for capital,
necessitating a painful rationalization process which mayhave had a longer time-horizort had
it taken place under the aegis of bank credit as opposed to an international share issue.
A trd, structural problem at Lufthansa was the high cost of its
operations. As noted above, administrative staff had increased 47% between
1986 and 1990. Moreover, partially because of high social insurance costs,
personnel costs at Lufthansa were a full 30% higher than those at its chief
European competitor, British Airways-119 Costs per-seat/per-mile were over
17c in 1991, compared with an average of 9.5c for American carriers, and of all
European carriers, Lufthansa had the largest gap between revenue and cost
per available ton kilometer.120 Wle
Lufthansa employees were not
officially Beamte, because of the company's private-law status, they
nevertheless received benefits and wages which were more in line with
public sector employees than those offered by other private airlines
competing in the gobal market. Infrastructure costs, such as airport tolls,
were also higher in Germany than in other European states. Finally,
structural inefficiencies at Lufthansa also contributed to higher costs. For
example, it used a hub-spoke system which was not appropriate for the
relatively small German domestic market. Lufthansa was also plagued by "'a
gridlock bureaucracy which stretched from the boardroom to the check-in
desk-11121
Thus, in 1992 Lufthansa found itself in a paradoxical situation. It
needed a capital increase in order to reduce overall company debt, and to
restructure the corporation in order to xeduce costs. At the same time,
however, is ability to raise capital was dependent upon rationalization efforts
prior to share issue, and the issue itself was in doubt due to the legal problems
accompanying a reduction in the state's share to under 50%. In many ways,
Lufthansals financial situation resembled that 'of the Bundesrepublik: a
combination of high costs and a downturn in the global economy led to a
capital shortage which could not be filled by traditional channels. Such was
the situation facing Jdrgen Weber when he was named Lufthansa's new
Chairman of the Board of Management in late 1991.
2-D-iii Weber's Project 93
119Parkes' "Lufthansa in Cost-Cutting Plan as Privatisation Looms," 116.
120"Lufthansa Managers Buoyed By Second-Quarter Results," Aviation Weekad Space
Technology, 134:2, July 12, 1993, 30; Anthonv L. Velocci, Jr., "Getting Competitive at
Lufthansa," Aviation Week and Space Technology, 138:10, March 8, 1993, pp. 36-39.
121Parkes, "Lufthansa in Cost-Cutting Plan as Privatisation Looms," H6.
57
In August, 1992, Weber introduced his new plan to restructure the
ailing Lufthansa, labeled "Program 93.11122The plan was to have three
distinct phases: rationalization; privatization; and reorganization. Each
phase was dependent on its predecessor: privatization was dependent on a
high share price which meant that the airline had to regain its
competitiveness to attract investors; while re-organizing the company into
independent units could only proceed when management had the necessary
capital and freedom (both from the government and the VBL) which
privatization would provide. The first, and most important phase
(rationalization) had four distinct components: workforce reductions and
wage restructuring; cost reductions and route consolidation; revenue
increases; and international alliances and international route strengthening.
2.D.iii.a Lowering Personnel Costs: The German Model In Action
The cornerstone of the cost-reduction package was the 1992 wage
agreement between Lufthansa and its two major unions, the Gewerkschaft
Offentliche Dienste, Transport und Verkehr (OTV, representing 15,000 bluecollar workers), and the Deutsche Angestellten-Gewerkschaft (DAG, representing 5,000 cockpit, cabin and technical crew-members).123 The
agreement froze wage increases for all employees, and created two lower
starting salary levels for entering employees. Moreover, overtime pay was
linked to monthly salary, replacing the previous practice of a common
overtime pay for all employees. Working hours for pilots were increased 7,
while management worked to curb wasteful practices such as the traditional
right of pilots to have separate meals provided for them on flights.124 A
122See Lufthansa AG, International Offering Circular Velocci, "Getting Competitive at
Lufthansa," 36-39; "Lufthansa Chief Plots Turnaround Strategy," Aviation Week and Space
Technology,138:10 (March 8, 1993), pp. 40-43; Christopher Parkes, "Survev of Germany,"
FinancialTimes, November 21, 1994, Survev, p. VIII; Volker W6rl, "SZ-desprAch mit
Lufthansa-Chef Jurgen Weber: Die Alterssiversorgungwird als Schicksalsfrage," Siiddeutsche
Zeitung, December 18, 1993;Parkes, "Lufthansa in Cost-Cutting Plan as Privatisation Looms,"
1:16.
123"Lufthansa, Unions Agree to Layoffs, Wage Freeze," Aviation Week and Space Technology
137:10,(September 7 1992),p. 51. The following discussion is also based on extensive interviews
with officials at TV and DAG, as well as with the head of Investor Relations at Lufthansa.
124Avivid example was set when Lufthansa fired a pilot who delayed a flight 45 minutes in
order for his meal to be prepared and loaded onto the plane after it had been forgotten. See
Parkes, Survey of Germany," V111.
58
supplemental agreement in October, 1993 provided a one-time payment to
employees which equaled an annualized wage increase of 23%, while pay
rates increased by a modest 2.79/ in 1994.125
Beyond freezing wage increases and trimming employee benefits, the
1992 agreement also provided for reductions in the workforce. The number
of employees at Lufthansa fell by 26% in 1992, and by over 8% in 1993 and
1994 -- the total number of workers decreased from around 49,000 in 1991 to
approximately 39,000 at the beginning of 1995.126Consistent with the "social
contract" model of German industrial relations, however, workforce
reductions were accompanied by various compensation packages. There were
four main categories of compensation, mostly connected with the age of the
employee in question: 1) early retirement (for those 58 and older); 2 extended
unpaid vacation leave (for those 53 and older); 3 voluntary dismissal with
compensation payments; and 4 an increase in part time work (from 5 of
workforce in 1990 to 10% in 1994).127Accordingly, Lufthansa could boast in
1994 that none of its 8,000 former employees were involuntarily dismissed
At 0TV, redundancies were structured so that younger employees and/or
those with families were protected. As one OTV leader expressed it, "the rule
was not last in, first out; rather first in, first out.11128
A final major issue in the 1992 wage agreement was the creation of a
low-cost airline to take over Lufthansa's domestic German routes due to the
high operating fees and costs in (see section 2.D.iii.b for discussion on route
restructuring). Lufthansa planned to establish its new Lufthansa Express as
an independent limited liability company (GmbH), to service domestic routes.
This was consistent with its future plans for restructuring the company into
independent units (or "profit centers") within the framework of a larger,
holding-company-type corporate structure (see discussion on restructuring in
section 2.E). The unions, however, were deeply opposed to the creation of a
125Deutsche Lufthansa AG, Anniial Report 1993, p. 24. Cockpit crews separately agreed to a
12.5% decrease in maximum salarv entitlements, with those alreadv benefitindallowed to
retain their salaries while accepting only 50% of future wage increases. Lufthansa AG,
InternationalOffering Circidar.
126Deutsche Lufthansa AG, Weltluftverkehr: bifthansa ind Konkiirrenz, (K61n: Deutsche
Lufthansa AG, 1994; David Waller, "State-owned Airline Prepares to leave the Nest: How the
Reorganization of Germany's Lufthansa is Cutting Costs," FinancialTitnes, May 10, 1994, 1:19.
Administrative positions were cut twice as much as other positions within thairline.
127Deutsche Lufthansa AG, Anniial Report, 1993; interviews with OTV and DAG officials,
Februarv and March, 1995.
1281nter'viws at OTV, Februarv, 1995.
59
two-tier wage structure, and feared the loss of political power at the firm level
which would accompany the creation of an independent company. The
unions were also concerned that Lufthansa Express would set a dangerous
precedent for future management-employee relations, whereby union power
would be diminished and new employees would be forced to accept lower
wages and benefits in comparison to older employees or workers at other
subsidiaries within the Lufthansa group. The compromise reached within
the 1992 wage agreement provided for the creation of Lufthansa Express, but
as a division within Lufthansa as opposed to an independent GmbH.
Accordingly, it is included in the same collective wage agreements which
govern employment conditions throughout Lufthansa. In exchange, the
unions agreed to a new, low-cost format, and pilots separately agreed to
longer workings hours consistent with the new structure.
Although the 1992 Lufthansa wage agreement was hailed as a new
model for industrial relations in Germany, this declaration reflects the
substance of the agreement rather than its form. The agreement was new in
the sense that labor agreed to substantial concessions and appeared to accept
the adoption of a new, "lean and mean" corporate governance structure. The
format of the negotiations, however, shows that the German model of strong
labor-management cooperation, coordinated decision-making, and extensive
information sharing was, in fact, validated by the new agreement. As all
parties to the negotiations pointed out in interviews, labor concessions did
not result from a shift in the balance of power at Lufthansa in favor of
management. Rather, compromise reflected a mutual recognition of the
crisis facing the airline, which stood at the brink of bankruptcy. The most
important challenges for the traditional German model lie in the future of
the company, as it faces increasing international competition and re-organizes
accordingly, as will be discussed below and in the conclusion.
The cutting of personnel costs was a critical element in the
rationalization program at Lufthansa, saving the company approximately DM
500 million between 1992 and 1994. During that same time period, unit costs
decreased 25%while productivity rose 37%.129Beyond these financial gains,
however, were the rewards associated with the changing perceptions of
financial experts, who approved of Lufthansa's efforts to increase
129Lufthansa AG, international Offering Circular Parkes, Ready for T-ke-off: The Share
Issue bv Germany's Lufthansa," 120; Parkes, "Survev of Germanv I Vill.
60
competitiveness. These perceptions were critical to the success of the
proposed share issue, both for maximizing share prices and for widely
distributing the shares among European investors. Personnel costs were just
one part of Lufthansa's Program 93, however, as both operating cost cuts and
revenue increases each contributed an additional DM 500 million to the
financial recovery of the carrier.
2.D.iii.b Qi2erating -Cost Savings and RQute Cnsolidation
In addition to cost savings through personnel reductions, Lufthansa
also cut total capital spending by 10% in 1993 alone, and sought ways to
control operating CStS.130 By the beginning of 1993, 26 aircraft were either
sold or decommissioned, and the entire fleet was to be reduced to 212 planes
by 1995.131Lufthansa sold its entire Airbus A310/200 fleet 13 planes) to
Federal Express, and the complete Boeing 737 fleet was also slated to be sold.
As mentioned above, the remaining fleet averaged just 54 years old, further
facilitating efficiency gains through reductions in fuel usage. Chairman
Jdrgen Weber highlighted this fact in an interview in December, 1993, noting
that Lufthansa had completed the difficult and expensive task of modernizing
its fleet, while other carriers still faced these massive CStS.132 Lufthansa also
reduced its stakes in the Kempinski and Penta hotel chains, and reduced its
massive inventory of spare parts.133 Company-owned facilities were sold or
leased-back, including the firm's
1n headquarters.
Other efforts at reducing inefficiencies and controlling costs involved
investigating and adopting new technologies. For example, satellite
communication and navigation technology was saving United Airlines
$100,000 annually.134 As mentioned above, more fuel-efficient aircraft were
expected to decrease overall costs. The German government also used
13OLufthansa AG, international Offering Circular Velocci, "Getting Competitive at
Lufthansa,"
36-39.
l3lVelocci, "Getting Competitive at Lufthansal" 36-39 WM, "SZ-GesprAch mit LufthansaChef JUrgen Weber: Die Atersversorgung wird als Schicksaisfrage."
132Wbrl,"SZ-GesprAch mit Lufthansa-Chef JUrgen Weber: Die Altersversorgung wird als
Schicksalsfrage."
133Parkes, Survey of Germany," VIII.
134"New Technology
Key to Airline Cost Cuts," Aviation Week ad
Space Technology 137:21
(November 23, 1992) pp. 42-43. One problem facing a global satellite system is that it requires
a global accord which is not forthcoming for political reasons.
computer modeling to simulate the flow of traffic through airports at various
times in order to explore more efficient uses for airport and airline
employees.
135
Lufthansa also targeted route consolidation and restructuring as
another area for cost savings. Consolidating routes, particularly to North
America (for example, dropping direct service to unprofitable routes such as
Charlotte and Philadelphia), saved 37 million between November 1992 and
January 1993 alone. 136 First class service on European routes was transformed
into a larger business class. As discussed above, Lufthansa Express was
established in October, 1992 to offer low cost service for domestic German
routes, including more flexible fares and ehanced customer services like
express check-in. Instead of using the traditional hub-spoke system,
developed in the United States to increase revenues per flight by increasing
load factors, Lufthansa Express adopted a "ping pong" system between selected
major cities.137 This reduces costs once spent on housing flight crews at hub
cities, while maintenance is able to be routinely and cheaply provided at
home cities. Despite rising airport fees, domestic service -_ which accounted
for 19% of revenues in 1994 -- achieved break-even results in 1993 and 1994
due to these improvements. Lufthansa's international network was
substantially strengthened by its global alliances, notably with United Airlines
and with Thai Airlines (see discussion below in section 2D-iii-d). While
these efforts reduced costs at Lufthansa, efforts were simultaneously directed
toward raising revenues.
2.D.iii.c Increasing Revenues
In addition to restructuring its European network to increase loadfactors, Lufthansa introduced a new frequent flyer program ("Miles and
More") and engaged in more competitive fare pricing in order to boost ticket
sales. Though an ardent opponent of "suicidal" price wars, Lufthansa
135"New Technology Key to Airline Cost Cuts," 42-43.
136Velocci,"Getting Competitive at Lufthansa," 36-39.
137Thehub-spoke system was found to entail higher costs in due to rising airport fees
(especially in Germany) and the inefficient use of employees -- as banks of flights come in
simultaneously, there is substantial idle time for airline'emplovees. See "New Technology Key
to Airline Cosi Cuts," 42-43.
62
adopted competitive pricing strategies designed to match rivals' prices.138
When the third phase of EU airline liberalization began in 1993 -- whereby
airlines could set up businesses or subsidiaries in any Member State, in
addition to introducing third-state cabotage rights (the right to pick up and
transport passengers within a third state on flights originating in another
state) -- Lufthansa initiated its "Welcome Europe" low-price campaign to win
new passengers, and also increased last-minute ticket sales. Global recession
and decreasing fares caused revenues to fall in 1993, although recovery
contributed to a 78% increase in revenues in the first six months of 1.994.139
Lufthansa also adopted a new marketing campaign designed to take
advantage of being "made in Germany," highlighting quality service,
punctuality and higher efficiency. It also established rail links to localities
within Germany to offer wider service in its domestic market. On the topic of
the new marketing approach at Lufthansa, Frederick W. Reid (Vice-President
for the Americas) stated, "We have fundamentally changed our thinking
from 'defending Germany' to competing in appropriate markets."140 Even in
the recession year 1993, Lufthansa's efforts were successful, as passenger load
factors on North American routes increased from 68.9% to 71.2% on
European flights from 54.2% to 58%, and on Asian flights from 64 to
69.7%.141 Lufthansa's share of overall world passenger traffic increased 69%
in 1993. These results are independent of Lufthansa's highly sccessful cargo
operations, where it is the world's leading freight carrier. A central factor in
increasing revenues and passenger demand, however, was the construction
of Lufthansa's global alliance system, the last element in the rationalization
phase of Weber's Program 93.
2.D.iii.d International Alliances
An important response to growing international competition in air
transport has been the formation of strategic alliances between airlines of
various states (see discussion above in section 2D.i.b). These alliances
provide many mutual benefits, the most important being: access to protected
138Velocci,"Getting Competitive at Lufthansa," 36-39.
139Lufthansa AG, international Offering Circular.
14OVelocci,"Getting Competitive at Lufthansa," 36-39.
14IDeutsche Lufthansa AG, Annual Report, 1993
domestic markets; increased revenues, as airlines are able to offer more
destinations at more flexible times and fares; risk sharing; and pooling of
resources for costly investments such as computerized reservations
systems.142 Thus, an integral part of Program 93 was the construction of an
international network which would provide Lufthansa passengers with
greater flexibility, particularly on North American routes. A few of
Lufthansa's important
international alliances and joint ventures are the following (a complete list of
Lufthansa equity holdings and strategic partnerships is found in Appendix B):
* strategic alliance with United Airlines
* strategic alliance with Thai Airlines
* strategic alliance with Brazil's Varig
* 25% stake in DHL for cargo business
* joint venture in Chinese aircraft maintenance venture, Amerco
* equity holdings in Austria's Lauda Air and Luxembourg's Luxair
* partner, with Luxair, in Cargolux Airlines
* 25% share in Skychef air catering company
* collaboration in freight hub in Sharjah in the Gulf, with plans to
expand into Indonesia
cooperative agreements with Japan Airlines; Air France; Finnair143
The construction of the global alliance of United-Lufthansa-Thai was a
key development in the recovery of Lufthansa due to the perceived need for
global carriers to build such alliances in anticipation of global liberalization in
air transport. Although cross-equity holdings were ruled out pending
privatization, the links between the carriers are expected to deepen in the
future to include such holdings.144
Lufthansa's agreement with United depended heavily on completion
of the US-German air traffic accord in March, 1994, which foundered over the
14217orexample, Lufthansa is working with VARIG to develop the AMADEUS reservation
system in Brazil. Lufthansa AG, International Offering Circular
143List complied from Lufthansa AG, International Offering Circular
;Velocci, Getting
Competitive at Lufthansa," 36-39; Parkes, "Readv for Take-off: The Share Issue by Germany's
Lufthansa," 120; Parkes, "Survey of Germany," VIII.
144Curiously, the absence of such links, combined with the intensity of trans-Atlantic air
travel competition caused some skepticism among investment experts regarding the Lufthansa
privatization until the pension issue was resolved. See Parkes, Ready for Take-off: The Share
Issue by Germany's Lufthansa," 120.
64
degree of access to the American market to be allowed German carriers.145
Previously, under a 1955 agreement, 76% of all transatlantic travel between
the US and Germany was allocated to US carriers. Under the new agreement,
the number of flights from Germany to the US would be frozen for two years,
and then gradually increase during the next two. Significantly,and
illustrative of increasing competition in the industry, there was significant
pressure from other US carriers to destroy the Lufthansa-United deal by not
approving the new agreement, yet tis opposition was overcome. The
agreement enabled a code-sharing agreement146 to be implemented between
Lufthansa and United Airlines, granting Lufthansa greater access to the
lucrative North American market and further facilitating its economic comeback. Lufthansa now offers its passengers over forty new destinations in the
United States and reservations for connecting flights on United are made
with the same flight and fare codes as normal Lufthansa flights.
By reducing operating and personnel costs, raising revenues, and
building international alliances, Program 93 dramatically rescued Lufthansa
from the brink of bankruptcy. Weber announced in 1994 that Lufthansa
would record its first profit since 1990, and offer its first dividend payment to
shareholders since 1989-147Not only was the financial health of the airline
more robust, but it was also perceived to be well positioned to successfully
compete internationally, especially given its massive capacity advantage in
eastern Europe. The next stage was clearly a capital increase to address the
capital quota problem outlined above. While this dovetailed the
government's interest in privatizing Lufthansa, it brought the pension issue
to the forefront as the key stumbling-block to the sale of the state's shares.
2-D.iv The Pension Hurdle
145jeffrey M. Lenorovitz, "Lufthansa To Choose US. Strategic Partner,"Aviation Week ad
Space Technology,139:11,September 13,1993, pp. 30-31. United was chosen over American
Airlines due to its more extensive Asian presence. See Reuter Text line, "Lufthansa -United
Airlines Alliance Wird Die Rentabilitit Beider Unternehmen Steigern," Oct 6 1993. See the
discussion in section 2.D.Lb on the international air transport industry generally.
146Suchan agreement allows two airlines to market each other's flights under'the same
ticketing code. For a discussion of the German negotiating strategy, see "SZ-Interview mit
Bundesverkehrsminister Wissmann: Lufthansa soll ein Global Player werden," SUddeutsche
Zeitung, October 8, 1993.
147Paul Betts, "Lufthansa
Likelv to Break Even This Year," Financial Titnes, April 5, 1994,
H9. Lufthansa AG, International Offering Circular
65
Since its beginning in 1953, pensions for Lufthansa employees were
provided by the Versorgungsanstalt des Bundes und der Under (VBL).148
Lufthansa had to satisfy the following three covenants to remain insured by
the VBL:
1) the government's share of the enterprise must not fall below
50%;
2) the firm must remain active in a sector wich serves the public
interest; and
3) the firm has to apply public sector wage scales or wage scales
which are substantially similar to public sector wage scales.149
Clearly, privatization implicated the first of these conditions. While the VBL
problem was recognized very early in the privatization process, it was ignored
because the financial health of Lufthansa precluded a successful share sale.
Once Program 93 began to show results toward the end of 1993, the VBL
problem shifted to the forefront of negotiations between the government,
Lufthansa, the VBL, and the unions and employees.
The security of employee pensions was a non-negotiable issue for
Lufthansa's unions, and management joined with labor to form a united
front in negotiations with the government and the VBL. In reference to the
pension issue, Weber stated that "the social implications [of privatization
without pension guarantees] would be unacceptable."150 Officials at
Lufthansa report that the government was, in fact, curiously indifferent to the
148TheVBLis a public institution which provided pensions to its members who do not have
civil servant status, but nonetheless work in enterprises which serve the public interest. Most of
its members are federal, regional and local authorities, although a few private stock
corporations, such as Lufthansa, are also members. The pension plans offered by the VBLare
designed to give members benefits on par with civil servants. Payments to the BL are made by
employers, and for most of its history, Lufthansa has paid more into the VBL than it has taken
out in pension payments. As a result, the VBL itself had an interest in retaining Lufthansa in
order to subsidize its other obligations to other members (such as local authorities). See
Lufthansa AG, International Offering Circular.
149Discussed in "Lufthansa Hintergrund: Lufthansa und die VBL," Deutsche Lufthansa AG, 6
JUP'111
1994; Lufthansa AG, international Offering Circular.
15 "Waigel Sieht Hohe LH-Verkaufserlbse" Reuter News Service, Mav 4 1995. Weber later
stated that the pension issue was the "question of destiny" for Lufthansa. W6rl, "SZ-GesprAch
mit Lufthansa-Chef Jrgen Weber: Die Altersversorgung wird als Schicksalsfrage."
66
VBL problem. Thus, the first task during the negotiations was to convince
the government that the VBL problem was one it should be interested in
solving, and then that it should contribute financially to the solution.151
Once the federal government joined the negotiations in earnest, the two
main issues were: 1) the assignment of risk in the event Lufthansa was
dismissed from the VBL due to privatization; and 2 the construction of a
post-privatization pension scheme.
There were several options open to the parties to solve the VBL
problem.152 Two radical solutions were immediately dismissed: 1 a
government take-over of Lufthansa pension obligations; and 2 a Lufthansafunded transferal from the VBL to another, private insurance system. Both
options were too expensive for the parties implicated. An acceptable solution,
therefore, had to be one which was jointly funded by the goverrunent,
Lufthansa, and the VBL. One major debate which delayed consideration of
various options, however, was the simple question of who bore the risk in
the event Lufthansa broke the first VBL requirement in the absence of an
agreement between the parties.
If Lufthansa had been privatized without addressing the VBL problem,
several scenarios were plausible. The most likely result, which the unions
feared most, was that Lufthansa would simply be dropped by the VBL. As the
Lufthansa offering circular stated:
,,,unilateral termination by VBL would have resulted
in
Lufthansa being obliged to pay to VBL an amount equal to the
present value of the pension entitlements of Lufthansa's
pensioners, and to accrue pension provisions in respect of all
pension entitlements of all relevant employees.11153
Had this occurred, Lufthansa's balance sheet would have been overloaded by
pension claims and it would have become insolvent. Such fears were
1511riterviewswith Lufthansa officials, Februarv, 1995.
1521nterviewswith Lufthansa and union officials', February and March, 1995; see also Wbri,
"SZ-GesprAch mit Lufthansa-Chef Jurgen Weber: Die Altersversorgung wird als
Schicksaisfrage."
153Lufthansa AG, International Offering Circular 58. The only alternative open to Lufthansa
at that point would have been to file a civil suit against VBL and the government (the
government could also file suit against VBQ to force payment of claims. Yet VBLcould easilv
deny all coverage due to the violation of its explicit rules, while the government (as a simple'
majority shareholder) could also reject any demands for it to pay for the pension schemes.
67
grounded in the recognition by all parties that the government was unable
and unwilling to fund Lufthansa pensions after privatization, as this would
not only place great pressure on the treasury, but would also contradict its
stand against subsidies for European airlines. Negotiations, therefore, were
arduous and lengthy due to the delicate issue of how much each of the parties
would have to pay to avoid the greater costs of Lufthansa bankruptcy.
After rejecting the assignment of risk completely to the government or
to Lufthansa, two competing models emerged for a compromise plan.154 The
first, labeled the Zdsur-Model, proposed that current Lufthansa retirees
remain insured by the VBL, while current and future employees receive an
equivalent pension from a new company pension scheme. A competing
model would have Lufthansaremain insured by the VBL, under a negotiated
exception to the VBL conditions strictly for Lufthansa, pending the creation of
a new in-house plan. Since the current, high level of pension benefits was
most secure under continued VBLinsurance, the unions preferred the second
model, while the VBL was obviously opposed. The complicating factor
throughout the negotiations was the lack of a precedent for a company being
forced out of the VBL due to privatization, thus the VBL was concerned about
the ramifications of the Lufthansa settlement for future cases.
After months of negotiations, an agreement between the government,
Lufthansa and the VBL was announced on May 4 1994.155Under the terms
of the agreement, pension claims for Lufthansa retirees remain with the VBL
and are funded through payments by the federal government totaling DM 1.1
billion, spread over 15 years (DM 80 million per year). Lufthansa is
responsible for designing and funding an in-house pension scheme identical
to that previously provided by the VBL. The new Lufthansa pension fund
154Interviews with Lufthansa and union officials, Februarv and March, 1995;see also Wbrl,
"SZ-GesprAchmit Lufthansa-Chef Jurgen Weber: Die Ateisversorgung wird al'
Schicksaisfrage."
155See Lufthansa AG, International Offering Circular "Lufthansa Hintergrund: Lufthansa und
die VBL," Deutsche Lufthansa AG, 6 July, 1994; "Lufthansa reif zur Privatisierung. Waigel hat
der L6sung des Pensionsproblems zugestimmt. " Siiddeiitsche Zeitling, May 4 1994 "Die
Lufthansa enffliegt dern KAfig:70re auf' fOr Kapitalerh6hung und Privatisierung." Neue
Ziiricher Zeitung, May 5, 1994; "Weg FOr Weitere Lufthansa-Privatisierung Frei," Reuter
German News Service, Mav 41994; "Waigel Sieht Hohe LH-Verkaufserl6se" Reuter News
Service, May 4 1995; David Waller, "Lufthansa Privatisation Clears Last Hurdle," Financial
Times, May 5, 1994, 12; Hans Ehnert, "Lufthansa-Privatisierung Wird Nicht Billig," Reuter
News Service, May 41994. This section is also based heavily upon interviews with Lufthansa
and union officials, Februarv and March, 1995.
68
will cost DM 16 billion, with DM 1.1 billion provided by Lufthansa, and the
remaining DM 500 million provided by the federal government (classified as
"interest payments"). In addition, the government established a DM 1.1
billion guaranty fund for current Lufthansa employees in the event of
insolvency.156 The resulting DM 16 billion will be paid over ten years,
increasing the federal government's annual payment for the Lufthansa
privatization to DM 154 million for the next ten years, and DM 80 million for
an additional five years.
Such a large settlement could not go uncriticized, and some analysts
questioned whether the costs of privatizing Lufthansa outweighed the
budgetary benefits.157 Given the federal government's DM 500 million
payment to Lufthansa, the government also appeared to undermine its own
position against subsidies for European airlines. Lufthansa and the
government quickly responded to such arguments. With respect to the costs
of privatization, Finance Minister Theo Waigel stressed the fact that the sale
of the government's Bezugsrechte alone for the first share issue (estimated to
raise DM 154 million) would cover its first year of obligations to Lufthansa
and the VBL.158In addition, the sale of the government's stake was expected
to raise DM 31 billion for the treasury which, if applied to deficit reduction,
would result in interest payment savings of over DM 200 million annually -again, more than required to meet state obligations. It was also understood
that the DM 1.1 billion guarantee fund would only be implicated should
Lufthansa go bankrupt and current employees benefits need to be secured.
Given the low probability of insolvency, most experts did not include the DM
1.1 billion in their calculations of the final settlement. On the issue of the DM
500 million "subsidy," Lufthansa officials stressed that the VBL settlement
saved money for all parties concerned, thus the government's one-time
payment represented a settlement to avoid over DM 4 billion in potential
liabilities if the VBLproblem had not been solved and privatization had
156Lufthansa agreed to join the Pensionssicherungsverein (PSV) a private pension insurance
fund. The government's guaranty was provided to augment coverage from the PSV.
157Ehnert, "Lufthansa-Privatisierung Wird Nicht Billig." The costs of funding the new
company pension fund were expected to be over DM 89 million per year for Lufthansa,
complicating efforts to control cost increases. Lufthansa AG, International Offering Circular.
158"Weg Fiir Weitere Lufthansa-Privatisierung Frei," Reuter German News Service, May 4,
1994; "Waigel Sieht Hohe LH-Verkaufserhise" Reuter News Service, May 4 1995.
69
reduced the state's share under 50%, necessitating the dismissal of Lufthansa
from the VBL-159
Once agreement had been reached between Lufthansa, VBL and the
government, the deal had to be presented to Lufthansa's unions for
approval.160 A supplemental agreement was negotiated between the unions
and Lufthansa regarding the VBLsolution and Lufthansa's plans to
reorganize the company into separate subsidiaries under a holding-companytype superstructure (see discussion in 2.E.ii below). As pension rights had
been secured by the deal, the main disagreement arose over how to guarantee
workers rights in the new concern-structure. In a critical victory for the
unions, the independent companies within the holding-structure would each
be subject to the same collective wage agreement. Accordingly, Lufthansa and
the unions announced their agreement regarding the VBL solution and the
corporate reorganization plan. After the cabinet, advisory board, and the
general shareholders meetings had approved a capital increase, the way was
finally clear for a share issue without government participation, resulting in
the formal (partial) privatization of Lufthansa nearly ten years after
Stoltenberg originally tabbed it as a privatization candidate.161
2.D.v The 1994 Share Issue
1591nterviewwith Lufthansa officials, March, 1995. Lufthansa's legal experts maintained
that the federal government's payments with respect to privatization did not constitute "state
aid" within the meaning of Article 92 of the Treaty of Rome, y et neither thev,
I nor the
government's counsel could guarantee that the EU Commission would not investigate the
transaction for possible violations. -fhe VBLagreement was submitted to the Commission for its
review, and no problems were foreseen by the parties prior to the share issue in autumn, 1994.
See Lufthansa AG, International Offering Circular.
160"OTV- Noch Harte Verhandlungen Zu Lufthansa-Paket," Reuter German News Service,
Mav 5, 1994;interviews with union officials, February and March, 1995.
161uentin Peel, "Lufthansa sell-off Plan Approved," FinancialTimes, May 20, 1994,1:2.
Shareholders approved the plan at their annual meeting in July. Waller, "Lufthansa Returns
to the Black at Midway," 123. At the same time, Lufthansa announced it would pay its first
dividend in five years. In 1989, Lufthansa paid dividends of DM 4 per share, then in 1990 DM
2.5 per share (for preferred shares only). In planning its dividend payment scheme, Lufthansa
made it clear that it would first pay preferred shareholders the guaranteed dividend through
1995 (DM 25 per share) in additional to any dividend received in the 1994 fiscal year.
Lufthansa further reported in August, 1994that its pre tax profits increased in the second
quarter from DM 23 n-tillion to DM 163 n-dilion from 1993 to 1994. "Lufthansa Sieht Sich Wieder
Dividendenfthig," Reuter German News Service, August 19, 1994.
70
The plan to reduce the government's share to below 50% involved a
three-stage process.162 First, the state would refuse to participate in another
stock issue, dropping its share to 40%. Second, an iitial tranche of
government shares would be sold to private investors. Finally, the
remaining government shares would be sold by the end of 1995, provided the
market for the shares was favorable. The significance of the issue was larger
than the comparatively small size of the capital increase itself. For Lufthansa,
according to Weber, the main benefit of privatization was "the psychological
effect on employees and customers-11163Investment bankers, less sensitive to
the political issues surrounding workforce reductions, claimed that
privatization allowed Lufthansa greater freedom to implement further
rationalization and cost-cutting measures.
Although by international standards, the size of the Lufthansa issue
was quite small, there was extensive international interest due to the
perception that it would prove to be a "trial run" for the privatization of
Deutsche Telekom in 1996.164 According to the Financial Times, the
Lufthansa share issue would influence "future privatisation issues, German
companies' attitudes to new methods of promoting investor interest and the
way in which big German banks are being forced to relax some of the cosy
practices of which foreign banks have often complained-11165More broadly,
the Lufthansa privatization issue was part of a larger effort to establish
"Finanzplatz Frankfurt" as a main financial center in Europe by overcoming
traditional views in the international investment community that the
German capital markets were relatively weak and offered few prospects for
attractive returns.
The Lufthansa share issue implicates and forces a re-evaluation of the
literature on the links between industry and the universal bankS.166
162Waller,
"Lufthansa
Privatisation Clears LastHurdle," 12.
163David Waller, David, "State-owned Airline Prepares to Leave the Nest: How the
Reorganization of Germany's Lufthansa is Cutting Costs," FinancialTimes, May 10, 1994,1:19.
164Andrew Fisher and Antonia Sharpe, "A Test-Flight Towards Prize on thei4orizon: Method
of Lufthansa Issue Clears Way for Deutsche Telekom," FinancialTimes, September 12, 1994,
1:17.
165Fisherand Sharpe, "A Test-Flight Towards Prize on the Horizon: Method of Lufthansa
Issue Clears Way for Deutsche Telekom," 117.
166See e.g., Alexander Gershenkron, Economic Backwardness in Historical Perspective
(Cambridge, MA: Harvard University Press, 1962); Peter Katzenstein, Between Power and
Plentu (Ithaca, N Cornell University Press, 1978); John Zysman, Governments, markets, and
Growth (Ithaca, N Cornell University Press, 1983).
71
Although the view of the uiversal banks as the main engine of economic
growth in Germany has been criticized by scholars emphasizing regional
bank-industry links,167it i undisputed that the equity markets were never a
primary source of liquidity for German firms. Even when major German
companies issued stock on domestic exchanges, the majority of shares were
purchased by their bank partners, forming strong cross-equity links which
discouraged outsiders to invest in such firms. These links simultaneously
explain and are explained by the specific design of the German securities
exchanges and the investment habits of German citizens. While more than
20% of citizens in the Uited States and Great Britain own equity shares in
listed companies, oly 6 of Germans do. At the end of 1993, market
capitalization of German shares comprised 30% of GNP, as compared to more
than 60% in the United States and Japan.168 Institutional features, such as the
lack of insider trading regulations, further undermine the popular confidence
necessary to facilitate widespread public ownership of equity securities by
perpetuating the notion of a select group of insiders with exclusive access to
valuable corporate information.
The push to privatize Lufthansa coincided with a more general effort
by the Kohl administration to deepen the German capital markets (to use the
government's terminology, to construct "Finanzplatz Frankfurt"). These
efforts reflected the many international and domestic factors which pressured
both the federal government and the various securities exchanges to
restructure existing financial institutions. First, the enormous costs of
unification went far beyond even the substantial resources of the universal
banks. The government therefore had to appeal to both domestic and
international investors to attract investment capital for domestic enterprises
in eastern and western Germany. Second, the integrity of the traditional
corporate governance structure was shaken by the Schneider and
MetallgeselIschaftscandals, in which poor bank oversight led to gross fiscal
mismanagement which led these concerns to the brink of bankruptcy.
result, experts called for greater transparency in company affairs by
As a
strengthening capital markets -- thereby broadening ownership and
167S'
ee Richard Deeg, Banks and the State in Germany (Ph.D. Dissertation, M.I.T. Political
Science Department,
1992).
168David Waller, "Survey of German Banking and Finance," FinancialTimes May 31, 1994,
Sec.
72
increasing monitoring of management through market forces (the market for
corporate control, for example). Third, greater international competition in
financial services, combined with the rise of massive and rapid global capital
flows, was channeling investment to more secure and predictable markets in
London and New York, thereby diverting a vast source of urgently-needed
capital away from Germany-169 Finally, developments toward monetary
union in the EU influenced the German government's desire to base the new
European Monetary Institute in Frankfurt as a symbol of Germany's strong
influence over European monetary policy. Accordingly, in order to
strengthen the appeal of German securities exchanges, the government (in
cooperation with the Bundesbank) approved the establishment of an
electronic futures market, the DTB; allowed for the existence of money
market funds; and relaxed minimum reserves requirements for banks.
Significantly, the federal government passed the Second Financial Markets
Act in July 1994 wich mandated criminal penalties for insider trading
abuses for the first time-170
The Lufthansa share issue was thus an integral part of the
government's effort to showcase its securities markets and to spread
ownership as widely as possible, including among international ivestors.
An important aspect of the Lufthansa share issue which forwarded these
goals was the decision to make the offering international in scope. Dresdner
Bank lead a consortium of 20 banks, including Morgan Stanley Co
International, S.G. Warburg and Paribas.171 Although bankers hoped for a
truly international offering, the issue was bounded to ensure that ownership
remained primarily in German hands due to EU and German regulations
surrounding airline ownership.172 Accordingly, the large US market was
169jeffryA. Frieden, "Invested Interests: The Politics of National Economic Policies in a World
of Global Finance," International Organization 45:4 1991): 425-451.
17OFo a detailed description of the legal and political dimensions of the Second Financial
Markets Act, see Daniel J. Standen, "Insider Trading Reforms Sweep Across Germany: Bracing
for the Cold Winds of Change," Harvard Iternational Law journal, 36:1 (Winter 1995): 177206.
17ILufthansa AG, International Offering Circular "Lufthansa-Privatisierung Begonnen."
Reuter German News Service, September 22,1994. Curiously, Dresdner Bank was selected due to
the influence of Aufsichtsrat chairman Dr. Wolfgang R611er,who was also the chairman of the
executive board at Dresdner Bank. interview with Lufthansa officials, March, 1995.
172"Lufthansa-Privatisierung Begonnen." As discussed below, these regulations are currently
blocking the complete privatization of Lufthansa. See section 2E below.
73
excluded from the offering, although US investors will be eligible for the
second tranche of Lufthansa shares scheduled to be sold in 1995.173
Another issuing technique used for the first time in Germany to
ensure investor interest and a high share price was the bookbuilding method.
This system, which is standard practice in the United States and Britain,
involves undertaking a "roadshow," where corporate executives inform
potential investors about the prospects for the company, while investment
bankers gauge investor interest in order to set the optimum price for the
eventual offering. This method also enables the company to target long-term
investors before the share sale takes place.174 Ts method contrasts sharply
with the traditional German practice of fixing a price before the issue, thus
subjecting the offering to the risks of the market. Owing to the success of this
process in the Lufthansa offering, experts such as Werner Michael Waldeck,
former Chairman of the Frankfurt Stock Exchange, were convinced that the
traditional method would be left behind.175 Regional German banks,
however, were somewhat critical of being confined to their home base in
selling shares allocated to them under the book-building method (which
takes advantage of local contacts).
The Lufthansa share sale finally took place in October, 1994, and was
highly successful due, in part, to the use of these new investment banking
techniques-176 The issue was oversubscribed, allowing the government to sell
1730fficials at Lufthansa argue, however, that the decision to exclude the US from the
offering was based primarily on two factors: 1) the lack of a strong interest in Lufthansa's
shares in the US; and 2 the fact that registering the shares pursuant to a Rule 144a offering
would be too time consuming and costly for Lufthansa, considering the differences in accounting
procedures which make it difficult for German firms to comply with United States securities
laws. Interview with Lufthansa officials, February, 1995.
1741nthis way, the bookbuilding method allows banks to avoid the volatilityI of the market in
order to privilege institutional investors. "Lufthansa Mit Neuern Pazierungsverfahren."
Reuter News Service, September 71994.
1751nterview with Werner Michael Waldeck, February, 1995. See also "Lufthansa Mit Neuem.
Plazierungsverfahren." An important inquiry beyond the scope of this examination is the
influence of Anglo-American investment banking techniques on the traditional German model.
Specifically, it remains to be seen whether the "lean and mean" corporate governance structure
favored by such investment bankers will become the measuring stick for German companies,
perhaps threatening the traditional German model of management-labor cooperation (which
implicates higher costs than in the US or the UK). See discussion in chapter 3 on the future of
the German model.
176Parkes, "Ready for Take-off: The Share Issue b Germany's Lufthansa," 120; "Lufthansa
Erfolgreich Privatisiert." Reuter German News Service, September 30, 1994; "LufthansaPrivatisierung Begonnen." Reuter German News Service, September 22,1994; Fisher and
74
the first tranche of its shares under its so-called "green-shoe option," reducing
its stake in Lufthansa to 35% (see Table 28).177 The rights issue raised over
DM 12 billion for Lufthansa, and approximately DM 382.2 million for the
federal treasury through the sale of the state's Bezugsrechte and its first block
of shares.. Reflecting the advantages of the bookbuilding method, the final
share price was DM 182,just two Marks shy of the market value of DM 184.
Despite traditional skepticism surrounding continental privatization issues
and their traditionally poor post-sale performance, international investors
were apparently convinced by the rationalization program at Lufthansa.178
After overcoming substantial obstacles, Lufthansa could finally discard the
label "state-owned carrier."
2.E 1995 and Beyond: The Future of Lufthansa Through the Eyes of the Social
Partners
The partial privatization of Lufthansa in October, 1994 was not an end
in itself. Rather, for each of the parties involved in negotiating the final form
of privatization, it was a means to a larger end. To conclude this case study of
the Lufthansa privatization, therefore, it is important to identify the
challenges facing each party in 1995 and beyond.
2-.E.i The Fedgral Government
The revenues gained from the Lufthansa privatization were part of an
overall government campaign to reduce the overall federal debt burden. By
late 1994, it appeared as though these efforts were paying off, with the
government expecting a DM 10 billion debt savings in 1995-179Privatization,
however, was only part of a larger government consolidation plan which also
Sharpe, "A Test-Flight Towards Prize on the Horizon: Method of Lufthansa Issue Clears Way
for Deutsche Telekom," L17.
177Andrew Fisher, "Lufthansa Issue Increased to Meet Demand," FinancialTitnes, October 25,
1994,130. In contrast to earlier privatizations, there were no employee shares created pursuant
to the offering. For the sale of the second tranche of government shares, the unions are currently
negotiating for the creation of such special shares for workers at Lufthansa. interviews with
OTV officials, February and March, 1995.
178Antonia Sharpe, "Survey of International Equity Offerings," Financial Tbnes, September 21,
1994, Survev,
P. IL
179 "Kreditaufnahme 1995Zehn Milliarden DM Weniger." Reuter German News Service,
November 23,1994.
75
featured a modest tax increase, a freeze on spending, and a reliance upon 3%
projected growth in the economy in 1995. The government planned to sell its
remaining Lufthansa shares by the end of 1995 as part of larger project of
divesting state transportation interests, expanding and internationalizing
transportation systems (like railroads) in accordance with EU regulations, and
soliciting private capital for new projects, such as roads and rail links to the
former DDR.180 The federal government embarked upon a more aggressive
phase of privatization, expecting its proceeds to be over DM 7 billion by the
end of 1995.181The SPD, however, criticized the new privatization zeal,
accusing the government of "selling the family silver" in an attempt to cover-
up fundamental budgetary mismanagement in the wake of unification.182
With respect to Lufthansa, however, there was universal agreement that the
government could count its divestment as a major success.
Two key problems faced the government at the beginning of 1995.
First, the government needed to design a method for selling its remaining
36% share. Although the share issue in 1994 was vastly oversubscribed,
allowing the government to sell the first of two tranches of its own shares,
the government stopped short of divesting its entire stake. There were two
main reasons for this. The first was strictly financial -- as Lufthansa expected
to earn an estimated DM 700 million in profits over the next three years, the
government could not only receive dividend income, but could wait until
the share price was sufficiently high to sell its remaining shares at a
premium, further aiding in deficit reduction. Second, regulatory restrictions
currently block total divestment. In order to maintain its flag-carrier status
pursuant to Germany's bilateral air traffic agreements, Lufthansa must
remain 50% owned by German nationals. A similar EU regulation requires
Europeans airlines to be at least 50% owned by EU citizens.183 Absent an
amendment or repeal of these laws, any further sale of the government's
shares must involve placing restrictions on their trade, thus reducin share
0
9
price. For example, as opposed to bearer shares, the government could
180"Lufthansa soll 1995 voll privatisiert werden. Minister Wissmann erlAutert die
Verkehrspolitik der neuen Legislaturperiode." SUddeutscheZeitting, December 16, 1994.
181"'Milliardenerl6se FUr Bund Durch Privatisierung." Reuter German News Service, July 14,
1994.
182"Soziales Und Zinsen Belasten Haushalt 1995." Reuter German News Service, July 14, 1994.
183Regulation(EEC) 2407/92 governs the new European licensing procedures within the context
of the new third package of air liberalization measures. See Lufthansa AG, International
Offering Circidar , 53-54.
76
register its Lufthansa shares and require that these shares could only be traded
among German citizens. Yet this would largely defeat the main goal of
privatization for the federal government: to maximize revenues in order to
reduce the federal deficit. This paradox is the biggest obstacle to selling the
government's remaining shares by the end of 1995. Until it is solved, the
government will continue to hold a so-called "golden share" which it does
not want. A related problem is the unwillingness of regional authorities in
Bavaria and North Rhine Westphalia to part with their strategic stakes in
Lufthansa.184
Table 28: Change in Government Ownership 1993-1994)
Subscribed Capital
(before 1994 capital increase)
Subscribed Capital
(after 1994 capital increase)
51.42
35-68
1.77
1.77
1.03
0.50
1.03
0.40
2.21
1.77
Others
2.23
43.07
10.05
49.30
Total
100.00
100.00
Bundesrepublik
Deutschland
Kreditanstalt fijr
Wiederaufbau
Bundespost
Bundesbahn/
Deutsche Bahn AG
State of North Rhine
Westphalia
Other Land Authorities*
* = includes Hessische Landesbank and the MiInchener Geselischaft ffir Luffiverkehrswerte
Source: Deutsche Lufthansa AG, 1995
A second issue facing the federal government are the obstacles to
liberalizing air transport both within Europe and globally. Within the EU,
there appears to be two camps with respect to further liberalization: a
protectionist camp (France, Belgium, Greece, and Portugal) are strong
supporters of continued subsidies and protected markets, while another camp
(Britain, the Netherlands, and Germany) are lobbying for increased
184Franz Ageler, "rivatisierung;
1994.
Vater Staat macht auf privat." Top Business, December
77
liberalization and an end to state subsidies. Although the Commission is
pressing forward with an integrated air traffic system and increased access to
protected markets, this disparity between states will be hard to overcome,
especially in view of the fact that the "early privatizers" (British Airways,
Lufthansa) have a distinct competitive advantage over other firms which are
still state-owned, thus increasing the costs of rationalization for those carriers.
In the larger global context, the federal government will continue to be
periodically pressured by the need to renegotiate bilateral traffic agreements,
like the acrimonious process with the United States in 1993-94. In sum,
beyond its goals to completely divest, the federal government holds the role
of environment-setter -- attempting to widen the available market within
which Lufthansa is well positioned to successfully compete against other
national carriers.
2-E-ii Lufthansa
The partial privatization of Lufthansa. was the second element in the
overall plan of Lufthansa management to position the firm to successfully
compete in the global market. By January, 1995, the company had been
restored to profitability through the rationalization program, and had been
officially transferred out of state hands.185 The final stage was a planned
restructuring, whereby the firm's individual operations would become
independent, wholly-owned subsidiaries of Deutsche Lufthansa AG, which
would then resemble a holding company-186 These new subsidiaries were:
Lufthansa Cargo AG 4300 employees; operating in freight delivery);
Lufthansa Technik AG (10,000; maintenance); and Lufthansa Systems GmbH
(1100; information services). At the parent company 24,000), the board of
directors was reduced from six to five members, representing three primary
departments (chair of the board; finance; personnel) and two operational
spheres (passenger service; and operations - a merger between flight business
185Lufthansaannounced in late 1994that profits by 1997 would be in the range of DM 500-700
million. "Lufthansa-Sanierung Ist Voll Gelungen." Reuter German News Service, January 20,
1995.
1861nterviewswith Lufthansa officials, February, 1995. See also "Lufthansa-Sanierung Ist
Voll Gelungen;" "Eine neue Konzemstruktur ftir die Lufthansa. Fracht, Technik und
Bodendienste sollen selbstdndig werden." SUddeutscheZeitung, January 10, 1994; "Lufthansa
zuendet zweite Stufe der Sanierung." SuddeutscheZeitung, September 16, 1994. The consulting
firm of Roland Berger Partner (Munich) was retained to design the plan.
78
and maintenance).187 Figure 22 shows a schematic chart of the new concernstructure. A advisory board, consisting of the five board members and the
business directors of the nine independent businesses, will meet monthly to
coordinate decision-making and to develop overall firm strategy. Members of
the board of directors of the parent company will be chairmen of the advisory
boards of each subsidiary.
According to Weber, there were four primary reasons for the
reorganization plan:188
9 autonomous units are closer to customer and can respond
quickly to customer needs
• less red tape
• greater team spirit
• faster and more efficient reaction to changing customer needs
One additional reason for the reorganization was to give more
flexibility and international visibility to successful divisions, such as the
important cargo division 22% of revenues in 1993).189 An independent cargo
company, in turn, will be divided into regional share-holding companies to
increase flexibility. In this way, decisions are made quicker and closer to the
problem area, and finances become more transparent. The new division of
competencies between the parent company and the subsidiaries was succinctly
captured by the Financial Times:
"The result will be a wholesale restructuring
of the classic
German 'pyramid' management structure - where virtually
every decision is made at the apex - which will leave the main
board in charge of group strategy and the passenger airline, while
fostering entrepreneurialism in the other companies.
They will be expected to seek out new business and newcomers
apart from Lufthansa in the world market and.
counter cost
187"Eineneue Konzernstrukturftir die Lufthansa. Fracht, Technik und Bodendienste sollen
selbstandig werden."
188Deutsche Lufthansa AG, Annual Report, 1993
189Michael Mecharn, "Lufthansa Cargo Pursues New Identity, Partners," Aviation Week and
Space Technology, August 9 1993, pp. 3741.
79
pressures with 'greater flexibility' that is available to them under
the existing group structure."190
Although the efficiency gains from the new structure are yet to be quantified
by Lufthansa management, officials are convinced that the restructuring was
essential to the future global competitiveness of the company. This
restructuring plan is a visible example the adoption of decentralized, "lean
and mean" corporate governance structures at Lufthansa in response to the
apparent success of other, similarly-organized global competitors, such as
British Airways.
2.E.ii The Unions: Caught in the Middle191
German legal provisions have institutionalized the role of uions
in
negotiating wage agreements and participating in firm decision-making down
to the plant level.192 Such cooperation was critical to the success of
Lufthansa's Program 93, as the 1992 wage agreement slashed personnel costs
while the 1994 supplemental agreement allowed for Lufthansa's transfer out
of the VBL and the adoption of a new corporate structure-193 Significantly,
the unions negotiated a settlement to the restructuring plan whereby
employees at the various subsidiaries would all be compensated according to
one central wage agreement. There are indications, however, that this may
have been a temporary victory. Ultimately, Lufthansa officials intend to shift
to subsidiary-level wage bargaining, and larger international competitive
forces continue to pressure Lufthansa to cut costs and improve operational
efficiency. These pressures were universally identified by labor officials as the
biggest challenge for the future.
1901'arkes,"Survey of Germanv," VIII.
191Thediscussion in this section is based upon inteniews with union officials in February and
March, 1995.
192SeeJoan M. Feldman, "In Europe, Works Councils," Air Transport World(February 1993):7273.
193Curiousiv, when asked whether the 1992 wage deal was a uid pro quo for a favorable
resolution t the VBL problem and the Lufthansa restructuring plan, union officials responded
yes," while Lufthansa officials firmiv denied any such deal.
80
CEO
Finance
Personnel
Operations
Passenger
Traffic
---
Central Functions
Operative Functions
Lufthansa AG
LH
LH
Cargo
Technik
AG
AG
Condor
LSG
LH
LH
SKY-
Systems
Chefs
GmbH
Comm.
Holdg.
Other
Lufthansa Group
Figure 22 New Structure of Lufthansa Group
Taken from Lufthansa AG, Charts & Figures, February 1995
Beginning with the conclusion of the 1992 wage agreement, however,
the most important task for the unions was to maintain membership in the
face of massive job cuts. This was particularly the case for OTV, who bore the
brunt of workforce reductions, as the majority were in administrative
personnel and ground crew staff. In this regard, OTV has been relatively
successful, having recruited 2000 new members since 1992 3,000 were lost
through workforce reductions in the same period). Overall union strategy is
to maintain high membership and organizational cohesion to act as a
counterweight to management interests. Two primary challenges exist in this
regard: maintaining relations between OTV and DAG; and maintaining
cohesion within the unions themselves within the new holding company
structure at Lufthansa.
11
The relationship between the DAG and the OTV has been hostile
throughout the post-war period. This stems from fundamental
organizational differences between DGB unions (with wich OTV is
affiliated), which organize on the Industrieprinzip of "one industry-one
union," and DAG unions, which organize on the Berufsprinzip of
representing a particular occupation (white collar workers at Lufthansa, for
example). This fundamental difference is reflected in differing policies with
81
respect to a wide range of issues. Three principal examples of these
differences are:
9 Wages: the DAG. supports one broad income increase for all
employees, while OTV lobbies for scaled increases with lower
income workers receiving a higher increase than higher income
employees (the "Sozialkomponent");
0
Vacation Pay: DAG supports a uniform grant of 10
of
monthly income as vacation pay, while OTV supports a flat
payment of DM x thousand for all employees, again with the
purpose of leveling out differences between wage levels; and
e Working Hours: TV supported the 35 hour work week, while
the DAG was indifferent to working hours, choosing instead to
focus on compensation issues.
During the 1970s, relations between the two unions were openly
hostile, causing intense competition between them in recruiting new
members. One unfortunate result for both unions was that some new
employees would join neither union, eroding overall union strength. When
local labor organizations (for example, firefighters unions) threatened to band
with DAG to displace the OTV, the heads of both main unions met and
agreed to form a common front in negotiations with management. This
KonkorierendesMiteinander ("competitive co-existence") was established in
late 1994, after negotiations with Lufthansa had to be undertaken literally in
two separate rooms. This new cooperation is one vehicle through which
labor hopes to form a stronger balance to management interests.
The second main challenge to union cohesion is the new holding
company structure at Lufthansa. The first task for the unions was to elect
works councils for each of the new companies, and then to train them in
order to insure a united bargaining front at the individual company level.
According to OTV, negotiations will take place primarily at the company
level, but within a company-level "peak bargaining" arrangement, whereby
the head of OTV will have regular contact with Lufthansa chairman
rgen
Weber. Despite these institutional measures, unions are very anxious that
the new holding-company structure is simply the first step in an effort to
decentralize all labor relations. In the opinion of the unions, this would
seriously undermine union cohesion and thus reduce overall union
82
strength.194 One DAG official suggested that the new structure at Lufthansa
was the first step in privatizing the concern piece-by-piece in order to avoid
the time consuming and expensive process of organizing a share sale for the
parent company itself. Regardless of the presumed motive behind the
reorganization, union officials uformly
believed that decentralization,
though good for competitiveness, nonetheless had the negative side of
undermining union strength in order to proceed with further cost-cutting
measures which may not be possible at the corporation-level.
The intense pressure to reduce costs, moreover, stems from the second
major danger to union interests: those forces subsumed under the label of
"internationalization" or "globalization." Three distinct challenges face
unions in this regard: pressures to cut costs and to adopt "lean and mean"
corporate governance structures; the necessity to form global alliances with
other carriers; and changes originating from Brussels through new EU
regulation. The first set of pressures were discussed above in terms of wage
negotiations and the new concern-structure at Lufthansa. In this regard,
union officials hope to stress the productivity gains associated with a
contented and motivated workforce, as opposed to "negative" gains made
through continued cost-cutting at the expense of worker benefits.
The new trend toward global alliances presents an interesting
organizational problem for German uions. On the one hand, it is clear that
such alliances are essential for the future health of globally competitive
airlines. Latecomers face the possibility of being locked-out of such alliances,
which expand the network of routes available to participating airlines and
provide access to protected markets. On the other hand, workers at carriers
participating in such alliances must find some way to coordinate strategy in
term of their relationship with management. Again, the issue appears to be
one of balancing the power of management, which necessarily expands due to
such alliances. Owing to its membership in the International Transportworkers Federation (ITF), OTV was able to form a working group with an
affiliated union at United Airlines almost immediately following the creation
of their strategic alliance. The same was not true with Thai Airlines, which is
1940ne OTV official pointed to the example of ABB, which reorganized itself into 90
independent companies, resulting in an erosion of union strength. When the concern was
reconsolidated, the balance of power was clearly in management's favor. This is precisely the
scenario the unions at Lufthansa seek to avoid.
83
non-union. Yet the same issues exist with respect to both alliances: How will
cooperative flights be staffed? Which wage and benefit systems will be used
for which flights? Should the Lufthansa-Unlted-Thai alliance
evolve to
include cross-equity holdings, it will be imperative for the uions to establish
some kind of representation at Thai. Yet it is unclear what form such
organization will have, given political institutional constraints within
Thailand, as well as ordinary organizational difficulties within the unions
themselves.
Gaining institutional access to decision-making and establishing a
counterweight to management are issues which also face Lufthansa's unions
at the EU level. The problem of access stems from the perceived "democratic
deficit" within the EU, whereby workers' interests are only indirectly
represented in Brussels through national governments Uons
thus faced
two problems: first, they were lacking in complete information about what
was transpiring at the EU level; and second, their interests were not
completely articulated by the federal government. In order to solve both
problems, the unions have established offices in Brussels and act as
independent lobbyists for their conCerns. OTV sent Morlika Wulf-Mathies,
previously head of wage negotiations at Lufthansa and member of the
Aufsichtsrat, to Brussels as their representative. A second major problem was
similar to the other organizational puzzle with respect to global alliances.
Specifically, given the split in European airlines between state-owned
subsidized carriers and privatized ones, there are numerous barriers to a
united labor policy on air transport developments. While fora such as the
ITF and the Committee of Transport workers in the European Union (CTEU)
are useful in this regard, this internal division within the EU was universally
cited as a major problem for Lufthansa's unions and European airline
employee interests generally. Accordingly, the unions have joined Lufthansa
and the government in lobbying for greater liberalization within the EU and
the elimination of state subsidies.
Pressures from low-cost, non-union international carriers is perhaps
the chief problem facing Lufthansa's unions, who look to the federal
government and the EU to shield them from the possible social ramifications
of cost-cutting and lean-management. Developments such as the shift to a
decentralized holding-company structure at Lufthansa threaten to divide
employees between old and young workers. The uions are convinced that
84
these new corporate structures are the first step in a broader plan to negotiate
cheaper agreements with new employees, while maintaining existing
agreements with older workers until they leave the company or retire. How
the unions should respond to this development is unclear even within the
unions themselves. Some officials at OTV, for example, stress the need to
disell" the union to new members as the only way to maintain a united front
against management interests. Yet the series of compromises reached in the
1992 wage agreement and later seem to confirm the fact that cuts need to be
made, and the easiest way to do this for those social costs within the control of
German companies is to reduce entry level salaries and benefits. Thus, young
workers could either not join unions who easily sacrifice their interests, or
could gradually gain control of the unions and renegotiate agreements to the
detriment of older workers. This potential division between older and
younger workers due to international cost pressures is clearly a main
challenge to unions in the wake of Lufthansa's privatization.
To briefly summarize, privatization was not an end in itself for
management or labor at Lufthansa. Rather, it was a stage in an ongoing
process to adapt to international competitive pressures within the confines of
the traditional German model. At the same time, however, the compromises
necessary to save the airline may have set in motion a process which
threatens to undermine the German model itself, to the detriment of worker
interests. Caught between representing the interests of their membership and
facing international pressures beyond their control, unions are trapped in the
middle of the transformation taking place in the global airline industry, an
industry where oly a few global players will survive. Clearly, Lufthansa is
well-positioned to be one of these players by virtue of its spectacular
rationalization and restructuring process. The success of this process is even
more remarkable because it developed within the existing "social contract"
between management and labor; whereby corporate decision-making at the
firm level is undertaken within the framework of consensual negotiation
between management and labor (in works councils), while industry-level
wages and benefits are negotiated by peak-associations. Yet increasing.
international pressures are threatening to shrink the ambit of the social
contract, and it remains to be seen how far unions are willing to compromise
85
in the name of "competitiveness," when the traditional strengths of the
German model are being eroded by a new commitment to "profit iber alles."
86
Chapter 3 Conclusions - Privatization and the German Model
Privatization is the most visible example of the current process of
change within the public sector in advanced industrial states. The transfer of
public enterprises from state to private ownership and control is a dramatic,
and potentially enduring, redefinition of the state-society boundary after
decades of expansion following World War I
Given the profound effects of
privatization on traditional relationships between governments, workers and
managers of public enterprises, understanding the motives behind
privatization is central to examining and comparing changes within te
political economies of advanced industrial societies. The motives and
techniques of privatization are as many and varied as individual
privatization initiatives themselves, however, making it difficult to specify
particular motives for privatization in a given historical moment.
This study has tried to mix theory and practice by constructing several
ideal-typical theories of privatization and then testing them by exploring the
privatization of Lufthansa. Two goais directed the research for this work:
first, to add to the empirical data in order to describe what forces are driving
privatization in Germany, and advanced states generally; and second, to
examine how privatization influences larger changes in the German political
economy. This concluding chapter takes each of these goals in turn,
discussing first how the Lufthansa case adds to our understanding of why
states (especially Germany) privatize public enterprises, and second the
implications of privatization for the changing "German model."
3-A Lufthansa and Theories of rivatization
Examining the theories of privatization outlined in chapter in light
ofthe Lufthansa story, a distinction must be made between the first attempt at
privatization in the mid-1980s, and the successful attempt in the 1990s.
Entrenched regional industrial policy interests were able to defeat
Stoltenberg's first attempt at privatization because there were neither
compelling budgetary nor competitiveness reasons to sell the government's
shares. More precisely, budgetary and competitiveness motives were not
strong enough to overcome opposing interests and institutional hurdles to
87
privatization at the federal level in Germany. This begs the question, what
exactly changed between 1984 and 1994?
One conclusion from the Lufthansa story is that ideology is not a
primary motive behind privatization in Germany. In contrast to Great
Britain, where an explicit disdain for the public sector was a hallmark of the
Thatcher years, the Kohl administration never embarked upon a crusade to
roll back the frontiers of the state. There are two main reasons for this key
difference in approach: the first is party-political; and the second is
institutional. Since the creation of the Federal Republic in 1949, the political
landscape has been dominated by the two, broadly centrist parties (CDU and
SPD). Despite general differences in party programs and constituencies (the
CDU being conservative and catering to business interests, the SPD embracing
social democratic views and worker interests), both parties accept the social
market economy and narrowing victory margins in recent elections translates
into a general timidity to embrace radical views. Moreover, radical positions
are served by fringe parties, such as the Republikaner and the Greens. The
one party which embraces a radical privatization policy, the FDP, has suffered
heavy losses in recent elections, fueling the perception that their ability to
remain over the 5% threshold to remain in parliament is solely by virtue of
"loaned" votes from the CDU.195 It remains to be seen, however, how the
impact of new social movements and the growing dissatisfaction with the
established parties in Germany will affect the willingness of the CDU and the
SPD to adopt more radical stances in order to win support, or at lest define
themselves in contrast to their competitors. Indeed, the current
intensification of federal privatization efforts may be a product of a new effort
by the CDU to embrace more defining policies. As discussed below, however,
even this new initiative is justified not on ideological grounds. Rather, it is
based on budgetary and competitiveness concerns.
195Thisperception lies at the core of the current tension between the FDP and the CDU in recent
months. For example, in the wake of the elections in Hesse, FDP chair Klaus Kinkel fiercely
rejected the claim that their position in the Landtag as a gift from CDU voters, and
emphasized -the FDP's continuing re-evaluation of both its own program and the relationship
with the CDU/CSU. Regarding party politics in Germany generally, see Peter J. Katzenstein,
ed., Industry and Politics in West Germany: Toward the Third Republic (Ithaca, NY: Cornell
University Press, 1989);Gordon Smith, William E. Paterson, Peter H Merkl and Stephen
Padgett, Developmentsin German Politics (Durham, NC: Duke University Press, 1992);Herbert
Kitschelt, The Logics of Party Formation: Ecological Politics in Belgium and West Germany
(Ithaca, NY: Cornell University Press, 1989).
88
Institutional structures in Gennany amplify this emphasis on
moderation and compromise. Two features have special relevance to the
pace and scope of privatization: the necessities o coalition government; and
the particular system of German federalism. Coalition politics requires
compromise among the ruling parties to navigate necessary legislation
through par'dament. 'Duch was the case with the Lufthansa project in 1984:
although te FEIPand CDU were solidly behind partial divestment, regional
interests Yesulted in insurmountable CSU opposition. The ability for
coalition rifts to frustrate policy initiatives is enhanced by the hurdles of
German federalism. Specifically, the capacity for Under interests to block
legislation in the Bundeesratis a key obstacle for radical policy programs.
Strauss' ability to undermine the first attempt to sell the federal government's
shares in Lufthansa was linked to his credible threat of Bundesrat veto. As
federalism in Germany responds to increasing EU regulation, the interests of
the Under have assumed even greater strength in watering-down executive
policy projects.196 Given the decreasing number of federal assets, the future
of privatization in Germany depends on attitudes at the Under and
municipal levels. As Waldeck documents, while federal industrial assets
were valued at DM 74 billion at the end of 1992, Under and municipal assets
totaled DM 13 billion.197
Another institutional barrier to ideologically motivated privatization
in Germany is the relative weakness of the capital markets. Due to the heavy
dependence of share issues on the perceptions of experts in the investment
banking community, even substantial reforms enacted recently by the Kohl
administration will take time to bear fruit in attracting large flows of foreign
investment capital.198 Again, Britain provides a useful contrast, where the
size and maturity of the City of London was a major facilitating factor in the
success of the ambitious British program. Despite efforts to construct
196SeeRichard Deeg, "Germany's Lander and the Federalization of the European Union" Paper
presented at the American Political Science Association, New York, September 4 1994;Razeen
Sally and Douglas Webber, "The Solidarity Pact: A Case Study in the Politics of Unified
Germany," Gernan Politics, 31 (April 1994): 18-46.
197Werner Michael Wa!deck, "Privatisation: The Philosophy in Germany," Paper presented
at the 18th Congress of tire European Federation of Financial Analysts'
Societies, 20-23
1
September, 1994. On new II-Anderinitiatives, see Michael Lindemann, "Survev of Germany,"
Financial Titnes, November, 21, 1994, Survey,I p. viii.
-
198SeeDaniel J. Standen, "Insider Trading Reforms Sweep Across Germany:
I Bracing for the
Cold Winds of Change," Harvard International Law fournal, 36:1 (Winter 1995): 177-206.
89
"Finanzplatz Frankfurt," it was telling when Deutsche Bank located their
electronic futures practice in London instead of Frankfurt.
In sum, both party political and institutional factors preclude an
ideologically driven privatization program in Germany. When privatization
has occurred at the federal level, it has been done in a step-by-step, deliberate
manner, in full cooperation not only with coalition and opposition parties,
but also within the framework of the larger industrial relations system. Thus,
ideological motives and economic principal-agent theory played a marginal
role in the privatization of Lufthansa, and are not as useful in explaining
privatization in Germany as compared to other states" such as Britain, where
such factors are more important.
Similarly, issues of domestic consolidation were not critical to the
Lufthansa story. After the failure of Volkskapitalismus in the 1960s, efforts to
break unions have not been paramount in federal privatization. Although
employee shares have been sold in many of the privatized enterprises, they
comprise a relatively low number of shares and serve mostly as a token
incentive to spur greater productivity. Significantly, employee shares were
not created for the Lufthansa offering, although there was a proposal to
include them in the next share sale in 1995. This is not to say that issues of
legitimacy were not critical to the Lufthansa story. A combination of
budgetary crisis and rapid change in the airline industry proved to be decisive
in the privatization process. Each of these factors challenged the federal
government's ability to respond to dramatic domestic and international
change.
The first important force shaping privatization was the budgetary crisis
of unification. The massive shift in the level of the budget deficit due to
unification costs created a crisis-space wich allowed the Kohl administration
greater discretion within wich to experiment with new, bolder policies.
Given the administration's desire to avoid funding unification through
significant tax increases, privatization offered an attractive way for the federal
government to receive massive, one-shot infusions of funds which could
meet what was expected to be a one-time era of massive expenditure.
Although the Kohl administration's arguments in favor of privatization
were couched in the language of free-market libertarianism, the force of the
90
federal government's position came from its detailed cost-benefit analysis.199
Significantly, in the case of Lufthansa, groups expected to opposed
privatization were mostly silent. The SPD tacitly supported the goverru-nent's
plans for LLufthansa wile unions were more concerned about protecting
pension benefits and participation in corporate decision-making in the postprivatization era, than rejecting privatization itself.
Although the federal government's interest in deficit reduction helped
overcome traditional regional opposition to privatizing Lufthansa, focusing
on the government alone ignores half of the T ufthansa story. Another
interesting counterfactual is he query, would Lufthansa have been privatized
even in the absence of budgetary crisis Parallel to developments at the
federal government level, were important changes within Lufthansa, and in
the international air transport industry generally. The convergence of these
domestic and international pressures led 'to the privatization of Lufthansa,
and helps explain the renewed zeal of privatization in Germany, and in
advanced industrial states generally.
As detailed in chapter 2 the financial health of Lufthansa was a critical
factor controlling0 the timing of privatization. While the poor financial
position ol Lufthansa was partially the result of bad judgment by previous
managers, developments in the international market contributed greatly to
the necessity for rationalization. Three distinct pressures were outs"de the
exclusive control of both Lufthansa and the German government, yet directly
influenced the performance of the firm: 1) global over-capacity; 2)
infrastructure limitations among the world's airports; and 3 increased
competition due to global airline liberalization, particularly from low-cost
British and American carriers. Efforts within the EU toward greater
liberalization in air traffic amplifies these competitive pressures. The third
package of air traffic reforms, for example, removed restrictions on
establishing operations in other member-states by transferring licensing
authority to the European level.200
199Thecompelling 1992 report of the Finance Ministry, which summarized the results of an
extensive audit of federal assets with specific recommendations for partial or total sales,
illustrates this point. See Bundesminister der Finanzen, Bericht des Bundesninsters der
Finanzen zur "Verringerung von Betedigtingenund Liegenschaften des Bundes (Bonn: Ministrv of
Finance, 13 July, 1992).
20OSeeRegulation (EEC) 2407/92 for the details of the third package of air traffic reforms.
91
The cumulative effect of these pressures, combined with the high debt
levels at Lufthansa due to over-investment, threatened the existence of
Lufthansa itself. In contrast to other European carriers who benefited from
substantial state subsidies (such as Air France, Sabena or Olympic Air),
Lufthansa could not approach the federal government for aid, particularly
given the strains on the treasury due to unification and the Kohl
administration's position against subsidies. Combined with the severe
downturn in world demand for air travel due to the Gulf War and global
recession, the financial situation for Lufthansa in 1993 was critical. In
response, Weber's Program 93 restored profitability through a drastic cost-
cutting and rationalization campaign designed to convince he international
investment community that Lufthansa was a good investment. Again,
international forces played a critical role in the Lufthansa story, as attracting
international capital investment required Lufthansa to adopt measures which
were relatively new for German firms at that time. The company was pushed
by international forces in both the financial and. airline markets to adopt a
more "lean and mean," corporate governance structure. Privatization was a
key element in the reorganization program, owing to its effects on investor
perceptions of management independence and flexibility -- features critical to
responding to rapid changes in customer needs.201
As globalization and technological advance bring about changes in
what constitutes a failed market,202 governments are forced to re-evaluate
their traditional roles as either providers of these goods and services, or
heavy regulators of their provision. In a sense, internationalization turns the
concept of "national champions"' on its head. Instead of heavy state
involvement in critical sectors of the economy, either through infant
industry protection or by creating industrial conglomerates,
internationalization pushes states to deregulate as quickly as possible in order
201Thestrong influence of international forces is not uniqueto the air transport sector. Similar
developments have been observed in other traditionally protected sectors, such as
telecommunications. See Philip Genschel and Raymund Werle, "From National Hierarchies to
International Standardization: Model Changes in ihe Governance of Telecommunications,"
Journalof Public Policy 13:3 (July-September 1993): 203-226; Wayne Sandholtz, "nstitutions
and Collective ction: The New Telecommunications in Western Europe," World Politics 45:2,
(Januarv 1993): 242-270.
202"Faiied markets"' as used here mean either natural monopolies, as in the case of
telecommunications, or markets which implicate special national interests, such as airlines,
jails or utilities.
to position national firms to take advantage of expanding world markets.
The success of first movers, such as British Airways, influenced policy-makers
in Bonn and corporate decision-makers in K61n, as they worked together to
structure privatization. As a result of these changes, the federal
government's role has been transformed to environment setter, as opposed to
service or goods provider. In the airline sector, Bonn still has a critical role in
gaining access to protected markets through maintaining and expanding
bilateral traffic accords, and in promoting greater liberalization both within
the EU and globally, in addition to its traditional role as safety and
employment regulator.
In sum, the budgetary stress of unification created an opportunity for
the executive to implement bolder privatization initiatives, while the choice
of privatizing Lufthansa was shaped by its financial health, as well as by
international developments in the airline industry. This synergy between the
goverrunent's interest in deficit reduction and Lufthansa's successful
response to changing international conditions enabled privatizatio to
succeed. Critically, however, these pressures were filtered by existing political
and economic institutions. The key institutions identified in chapter
all
shaped the privatization process in the Lufthansa case. The iitial attempt by
Stoltenberg in 1984 failed because of divisions within the ruling coalition and
the existence of numerous veto points within the federalized structure of
policy-making in Germany. In contrast, the successful effort in 1994 depended
upon the transformation of traditional opponents through international
competitive pressures and the fiscal crisis of unification.
These institutional processes, however, were themselves unchanged by
these new pressures. Specifically, the contours of privatization were shaped
by negotiations between the government, management and labor. These
discussions were critical to the ultimate success of the Lufthansa share issue,
as unsolved social questions would have deterred investment and almost
certainly triggered a damaging confrontation between labor and management
at Lufthansa. These negotiations were nevertheless shaped by the new
financial and competitive reality facing Lufthansa in the 1990s. This leads to
the second main query of this study, could these new forces of globalization
alter existing institutions themselves? If so, what are the ramifications for
Germany's traditional social partners?
93
3.B Internationalization, Privatization and the "German Model"
The distinctive political economic institutions which are collectively
labeled the "German model" have been alternatively praised and eulogized.
This concluding section discussed four principal questions with respect to the
German model: What is it? What is threatening it's endurance in the 1990s?
What are some strategies to sustain or modify it? And how does the
Lufthansa case fit into these changes? I argue that the same international
forces which influence, privatization in Germany are also threatening changes
in the German model itself. The Lufthansa case is an example of how
international forces pressure domestic institutional filters in Germany.
3-B-i The "German Model" Briefly Defined
The merits
many scholars as
arrangemenis-203
"German model"
of the so-called "German model" have been praised by
a preferable alternative to traditional "Fordist" economic
Although the precise details of what constitutes the
are contested, most recognize that the particular
institutional arrangements which govern industrial production in Germany
are distinct from other capitalist societies. These institutional differences,
moreover, help explain the strong performance of the German economy, as
well as the egalitarian distribution of wealth in German society.204 Of the
many features of the German model, the following elements are most
important for our discussion:
9 The structure of the market in Germany is grounded in the principle
of the Sozialmarktwirscliaft a competitive market combined with some
203Pron-tinentworks on the German model and the current challenges to it include: Katzenstein
Industry and Politics in West Germany: Toward the Third Republic Micilel AF-ert,
Capitalism vs. Capitalism (New York: Four Walls, Eight Windows, 1993); Wolfgang Streeck,
"German Capitalism: Does It Exist? Can It Survive?" in Colin Crouch and Wolfgang Streeck,
eds., Modern Capitalism or Modern Capitalism? (London: Pinter, 1995);Gary Herrigel and
Charles F. Sabel, "Craft Production in Crisis: Industrial Restructuring in Germany During the
1990s" unpublished draft paper presented to CES, Harvard University (August 1, 1994);Herbert
Giersch, Karl-Heinz Paque and Holger Schmieding, The Fading Miracle: our Decadesof
Market Economyin Germany (New York: Cambridge University Press, 1992).
204See e.g., David Soskice, "The Institutional Infrastructure for International Competitiveness:
A Comparative Analysis of the UK and Germany" in Anthonv B. Atkinson and Renato
Brunetta, eds., The Economicsof the New Europe (London: MacMillian, 1993):45-70; Streeck,
"German Capitalism: Does It Exist? Can It Survive?"; Herrigel and Sabel, "Craft Production in
Crisis: Industrial Restructuring in Germany During the 1990s."
minimum "floor" of social equity. The prominent institutional features
created to guarantee these values are the powerful Bundeskartelsamt to
regulate competition policy, and the extensive social welfare system, which
insures a basic income for all citizens. In addition, extensive social
regulations governing employment issues also remove some aspects of
economic activity from market forces.
o As a result of a careful delineation of its powers and responsibilities,
executive power in Germany is divided, in Streeck's 1995) terms, both
vertically and horizontally. Vertically, the executive must share power with
the Under in two fundamental ways: national legislation must meet with the
approval of the Bundesrat; and certain policy areas are exclusively delegated
to Under authorities pursuant to the subsidiarity principle (for example,
education, environmental policy, and implementation of so-called
"framework legislation").205 Horizontally, the executive shares regulatory
power with several powerful, independent entities, notably the
Bundeskartelsamt and the Bundesbank. Lacking strong tools of industrial
policy, the federal government plays the more passive roie of "environment
setter" -- setting the rules of the economic game, as opposed to shaping
industrial outcomes.
o A final important macro-institutional feature is the para-public
institutions which have been granted substantial regulatory authority by the
state. The most notable of these for our discussion are the employer
associations, which cannot collude with respect to pricing (due to the
commitment to market competition), but can coordinate quality standards,
wage bargaining, vocational training standards, and research and
development goals. Another important self-regulatory institution (until the
recent era of reform in the 1990s) was the securities exchanges, which lacked
20SAIthough developments at the EU threaten a usurpation of these policy competencies, the
Ldnderhave been largely successful in retaining an important gatekeeping role in the
implementation and ratification of EU policy initiatives. See Richard Deeg, "Germany's
Lander and the Federalization of the European Union;" Fritz W. Scharpf, "The Joint-Decision
Trap: Lessons from German Federalism and European Integration," PtiblicAdininistration 66
(Autumn 1988): 239-278;Jeffrev Anderson, "Skeptical Reflections on a Europe of Regions:
Britain, Germanv, and the ERDF," ornal of Nblic Policy, 10:4 (October-December 1990):417447.
95
formal insider-trading laws, but functioned according to a code established by
the securities officials and traders themselves.206
* Beyond the macro-level institutional features listed above, three
prominent micro- or firm-level institutions are also important elements of
the German model. The first is the intimate links between the "universal
banks" and industry-207 The universal banks were the primary source of
capital for German manufacturing during industrialization, and again during
reconstruction following World War II. Links between banks and firms are
enhanced by equity holdings by the major banks, allowing them input in
corporate planning and thus supporting "patient" or "sticky" capital, which is
vital to long-term investment in innovation.208 Although scholars have
criticized the over-emphasis on national banks, highlighting local and
regional bank-industry links,209the dynamic in both cases is the same.
Accordingly, equity financing and the "market for corporate control," which
is so prominent in the United States and Great Britain, is largely absent in the
German model -- presumably contributing to long-term planning and an
emphasis on quality, as opposed to price and short-term profit maximization.
* A second micro-level institutional feature is the distinctive
cooperation between management and labor. This cooperation exists at two
levels: first, industry wide collective bargaining; and second, firm-level codetermination through works councils. Workforce participation in corporate
decision-making ensures general process of negotiated change and
coordinated reaction to shifts in demand. This cooperation enhances the
overall flexibility of German firms, and facilitates both worker productivity
and overall poduct quality. This is particularly important because most
German firms compete in high value-added niche markets, as opposed to
highly competitive, price-oriented markets. It is also the critical element of
the social partnership which is a hallmark of the Sozialmarktwirtschaft.
206SeeStanden, "Insider Trading Reforms Sweep Across Germany: Bracing for the Cold Winds
of Change," 177-206.
207See Alexander Gershenkron,
Economic
Backwardness
in HistoricalPerspective(Cambridge,
MA: Harvard University Press: 1962);John Zysman, Governments, Markets, and Growth
(Ithaca, NY: Cornell University Press, 1983).
208Bankliquidity was supported by exceptionally high savings rates among German citizens.
Important culturalvalues such as saving could constitute an additional feature of the German
model, but are excluded her in the interests of simplicity and parsimony. See, however,
Streeck, German Capitalism: Does It Exist? Can It Survive?"
209See Richard Deeg, Banks and the State in Germany (Ph.D. Dissertation, M.I.T. Poiffical
Science Department,
1992).
96
- Finally, the system of vocational training underpins the high-skill
base of German manufacturing. The dual system of general education and
apprenticeships guarantees a steady flow of skilled labor to German firms.
Again, this institution is essential, given the importance of skilled labor in
the production of complex, and frequently customized products.
These institutional features reflect societal values emphasizing a strong
commitment to both the open market and social egalitarianism. They also
support the general competitive advantage of German firms in high valueadded, high cost goods, such as luxury automobiles, and special,.Fy
manufactured goods, such as optics and precision machine tools. Not only
does the German model provide a steady pool of high skilled labor, low
inflation and a stable currency, and state-sponsored infrastructure and
research and development, but the distinctive industrial relations system
provides the basis of trust and risk-pooling which enables employers to
delegate to their workers responsibility for adjusting to changes in demand.
This flexibility stands in sharp contrast to the low-skill, highly-standardized,
and market-controlling features of Fordism, and was largely responsible for
the success of the export-led growth in the German economy during the
1980s.
Yet the success of the German model, Streeck 1995) argues, depends
upon three main factors: 1) stable or growing world product markets; 2 steady
product innovation in advance of demand shifts; and 3 a steady, but limited
supply of skilled labor to avoid shifts to low-cost markets where German
firms would be at a natural disadvantage due to the high costs of maintaining
its unique institutions. Toward the end of the 1980s, the ability of the
German model to maintain these conditions was questioned by many
scholars, while others argued that the German model may no longer be suited
for the new international economy.
3-B.ii What's Wrong With the German Model in the 1990s?
The magic balance between economic growth and social egalitarianism
appeared to melt away in the 1990s, as profits fell, market shares ebbed, and
unemployment rose. The shock of unification magnified this sense of crisis,
but unemployment in the west was already higher than previous levels in
the 1980s. Worse still, Germany entered its deepest recession in post-War
97
history in 1993. Most troubling, however, was the observation that
Germany's previously secure niche markets were being penetrated by owercost Japanese and American firms offering products of similar quality at lower
cost than those produced within the -gh-cost German model. While one
could argue that the crisis was merely cyclical, with the effects of downturn
simply exacerbated by the costs of uification, most scholars viewed
Germany's troubles as structural in nature. These structural explanations can
be grouped into three main theories: 1) "secular exhaustion;" 2 uification
shock; and 3 globalization.210
The secular exhaustion teory asserts that the very institutional
structures that were responsible for the success of the German model were
also the seeds of its own demise. The high costs of production eventually
crossed an economic threshold, whereby they began to hinder innovation and
productivity. Institutional rigidities in the labor market and in vocational
training, moreover, undermined the adequate growth of skills to maintain
the level of innovation necessary to support steady economic growth.
Finally, the institutions of worker-management cooperation precluded the
introduction of "lean" management systems, further inhibiting the
productivity gains and innovation which the high-quality Germaikmodel
depended upon for sustained growth. In many ways, the secular exhaustion
thesis is the economic version of the ideological theory of privatization. That
is, the possibility of reforming existing institutions is rejected due to a belief
that the system itself is inherently inefficient. In sum, the current crisis is
viewed by this theory as the logical result of a fundamental weakness in the
system itself, which the successes of the 1980s masked.
A second theory highlights the impact of unification on either
exacerbating existing structural defects in the German model, or
independently pushing costs above a level sufficient to remain
internationally competitive. The burden on the federal government due to
transfer payments and related costs of institutional transfer in eastern
Germany hinders its ability to maintain and upgrade existing institutions in
the west. As a result, innovation is inhibited from keeping pace with global
change. Beyond the macro-effects of unification on the federal government's
ability to maintain the critical infrastructure necessary for steady growth in
21OAdapted from Streeck, German Capitalism: Does It Exist? Can It Survive?"
98
the west is another, micro-level argument which is the industrial analog to
the "crisis-space" argument discussed above in reference to domestic motives
for privatization. Several scholars focus on the process of institutional
transfer in eastern Germany as creating opportunities for firms to experiment
with new forms of industrial relations which may have feedback effects for
existing western structures.211 Alternative structures, based upon lower
wages and benefits and reduced worker participation, threaten to undermine
existing, high-cost systems in the west, eroding the traditional strengths of the
German model.212
A final, globalization theory, resembles the internationalization theory
of privatization. Again, there are macro- and micro-economic aspects to the
growing influence of global economic developments on the German political
economy. Regarding macro-economic changes, Streeck 1995) points out that
the German model was based upon the relative immobility of production
factors. An adequate, but limited skilled labor pool and a secure flow of funds
from the universal banks to industry were bedrocks of the German system.
As transnational capital and labor flows increased, it became difficult for
national governments to regulate developments in either sector without
damaging their economics. Streeck points to the impact of immigration and
unification on the increase in the unskilled labor pool, which is incompatible
with "high. labor standards, an extended welfare state, and a normalized
pattern of high-wage and high-skill employment.11213 In addition,
international capital flows provide German firms access to cheaper
investment, undermining traditional links between the uversal
banks and
industry. Attracting these flows, a task made even more urgent by the
financial stress of unification, fuels the "deregulatory bias" of globalization,
211Seee.g., Stephen Silvia, Paper presented at MIT, October, 1994 (discussing changing
patterns within employers associations); Richard M Locke' Paper presented at MIT, December,
1994 (focusing on variations within identical industrial relations institutions in eastern and
western Germany).
212Thephrase "lower wages" is not meant to imply a zone of low-cost, low-skill production in
eastern Germany. In fact, unions and employer associations in the west structured unification in
a wav which intentionally raised wage levels in eastern Germany disproportionately to
productivity levels, thereby trading high unemployment in eastern Germany for security
against capital flight fromIwestern to eastern Germany. Rather, worker benefits are rlatively
lower than traditional arrangements in the west due to decreasing worker participation and
reduced bargaining power owing to the economic crisis of the post-unification era. See Silvia
(1994); Streeck, "German Capitalism: Does It Exist? Can It Sun-ive?"
213Streeck, "German Capitalism: Does It Exist? Can It Survive?" 22.
99
which threatens the extensive system of social protections and entitlements
that are characteristic of the German model.
At the level of the firm, globalization has revealed that the German
model, while more flexible than Fordist forms of production organization, is
nevertheless not flexible enough to keep up with other, more flexible forms
of industrial production, otably in Japan and the United States.214
According to Herrigel and Sabel 1994), distinctive institutional features in
Germany, particularly the vocational training system and the system of craft
certification, which supported the success of the German model through the
1980s, also creates barriers to further flexibility -- the type now being
demanded in the iche markets within which German firms traditionally
compete.
Specifically, the craft system of skill certification causes jurisdictional
conflicts to arise each time a firm encounters a radical market change which
demands a response from the firm in terms of organizational redesign. These
jurisdictional conflicts between crafts slows innovation necessary to respond
to rapid changes in global demand for given products -- a primary feature of
the new world economy in the 1990s. Moreover, bureaucratic structures of
decision-making within German firms further undermine a more intense
union of conception and execution. Hierarchies designed to coordinate
production among different craft groups (or Berufe) create so-called "dyadic
relations" within specific pieces of the production process, as opposed to more
open and flexible groups or teams containing many different kinds of
workers, which collaborate to structure and restructure production according
to ever-changing market signals.
A number of forces, therefore, ar e promoting change within the
German model. This change will not come easily, however. Institutional
rigidities reflect the importance of societal norms and values. The craft
system of skill certification, for example, is not only a system which reinforces
trust among employers, but is also a critical source of identity for industrial
workers. The pride associated with the Berufe, as Herrigel and Sabel
emphasize, makes it unlikely that a deconstruction of the craft system will
occur without substantial resistance. Scholars such as Suzanne Berger stress
the resilience of such micro-level institutions despite the pressures of
214Herrigeland Sabel, "Craft Production in Crisis: Industrial Restructuring in Germany During
the 1990s."
100
globalization which promote a degree of convergence with respect to macrolevel economic policy.215 The question thus becomes, are Gei-man firms
changing their operating structures due to international pressures? If so, how
do these changes represent fundamental institutional change? The final two
sections of this chapter discuss the range of responses observed in the German
political economy generally, and then the specific response of Lufthansa.
3-B-iii What Can German Firms Do?
Following the approach of Herrigel and Sabel 1994), minimalist and
maximalist responses to global change can be identified among German
firms. Minimalist strategies involve an effort by management, usually under
financial duress, to cut costs and adopt minor structural changes in
production. With respect to structural reforms, two distinct dynamics have
emerged from minimalist efforts at various German firms, each leading to a
similar problem. The first is that reform efforts are implemented only in
isolated reas. The second is that reform efforts are undertaken firm wide,
with the exception of "islands of tradition" within the firm. In both cases, the
reluctance to undertake total restructuring in the face of institutional
rigidities and entrenched opposing interests leads to a hybrid structure which
lacks the integration of conception and execution necessary to achieve real
efficiency gains. The reasons for the partial failure of such efforts are clear.
Deconstructing the German model involves altering workplace identities
which have evolved over many years. Displacing craft jurisdictions without
undermining the environment of trust they support is a difficult task, one
which has been approached only in piecemeal fashion at many German
firms. Maximalist strategies, while few in number, nonetheless provide
examples of radical change in production organization. In their article,
Herrigel and Sabel document the wide-ranging efforts at BMW to restructure
their production into flexible teams, eliminating traditional craft
jurisdictions, and reducing overheads and intensifying cooperation with key
2151'resentation at MIT, April 19, 1994. For an interesting collection of essays on the topic of
global convergence or divergence in industrial policy and organization, see uzanne Berger and
Ronald Dore, eds., Convergenceor Diversity? National Models of Production and Distribution
in a Global
Economy,
(Ithaca,
MY: Cornell UP, 1995).
101
suppliers-216 Management compensation is rewarded not on status lines, but
based upon the attainment of performance goals, while production is
organized into teams, which are given 9'eneral responsibilities without rigid
rules governing the method to fulfill their responsibilities.
Significant debate lingers, however, over the necessity for reform and
the precise impact of globalization on operations structures. The many
doubts regarding the impact of internationalization on the German model
can be grouped into three main arguments. First, many scholars doubt that
the magnitude and rapidity of financial and trade flows between states is any
greater than the period just prior to World War 1217 This leaves open the
possibility that national reactions to the negative effects of globalization
might lead to a retreat to extensive national regulation and closed borders.
Second, scholars argue that even if the magnitude or quality of transnational
activity is somehow more profound in the present age, micro-institutional
differences will remain despite general macro-economic convergence. Thus,
functional necessities in the new world economy could be met by a wide array
of possible institutional arrangements. Third, despite intense pressures in
some market sectors, other sectors may be more resilient to change. For
example, while Herrigel and Sabel focus on machine tools and automobile
production, developments in the chemical industry or, more importantly, in
the steadily growing service sector may be quite different. A fertile ground for
further research, therefore, exists with respect to quantifying the effects of
globalization on various states and on various industries within states. What
can the case of Lufthansa add to this research agenda?
3.B.iv What Can We Learn Froi-n Lufthansa?
216Herrigel and Sabel, "Craft Production in Crisis: Industrial Restructuring in GermanvI During
the 1990s," 22-29. BMW's reform efforts appear to have spilled over to their suppliers as well,
and the study also describes efforts at a small machine tool manufacturer in BadenWfirtternberg.
217See.e.g., Robert Zevin, "Are World Financial Markets More Open?" in Tariq Banuri and
Juliet B Schor, eds., FinancialOpenness and National Autonomy (Oxford, UK: Clarendon Press,
1992); Marcello DeCecco, "Short-term Capital Movements Under the Pre-1914 Intemational
Monetary System," in Barry Eichengreen and G. Braga de Macedo, eds., The Gold Standard in
Portugaland in the World (forthcoming); Suzanne Berger, "Introduction," in Berger and Dore,
Convergenceor Diversity? National Models of Production and Distriblition in a Global
Economy.
The case of Lufthansa is interesting because it lies outside the
traditional manufacturing focus of the literature on the German model. The
airline industry represents a sector which was expressly nationally controlled
until the recent global explosion in air travel increased competition among
international carriers. As traditional military and industrial policy
justifications for strong state-control over air traffic faded away, replaced by
intense competition among world commercial carriers, forces of globalization
motivated simultaneous changes in state policy and corporate governance.
The Lufthansa case illustrates both of these pressures: first, the state's push to
privatize the carrier in the 1990s;second, the efforts by Lufthansa
management to restructure its operations structures. The first part of this
chapter examined the effects of internationalization on the government's
decision to privatize Lufthansa. This final section explores how Program 93
adds to the evidence supporting either the transformation or the resilience of
the German model.
As detailed in chapter 2 Lufthansa's rationalization program proceeded
in two distinct phases. The first phase involved the massive cost-cutting plan
which featured substantial personnel reductions, wage freezes, asset sales and
efforts to increase revenues. A parallel project was the construction of
Lufthansa's international strategic alliance network, notably with United
Airlines, Varig and Thai. These rationalization and consolidation efforts
were central to the restoration of profitability at Lufthansa, and were -IL-he
key
precondition to any capital increase/privatization of government shares. The
second phase, conceived before privatization, but implemented afterward,
involved the restructuring of the company into individual subsidiaries under
a holding-company type superstructure. These efforts were designed to
increase flexibility by decentralizing decision-making authority, to increase
transparency of corporate finances, and to encourage entreper,-eurship among
company management. The driving force of these measures was to
effectively respond to increasing global competition by cutting costs and
enhancing service to attract a bigger share of the growing international air
traffic demand. The puzzle is what to make of these efforts in terms of the
debate on the changing German model.
Globalization clearly was the main pressure on Lufthansa to rationalize
and restructure. Profits were squeezed by falling ticket prices and increased
international competition from other, low cost carriers. Moreover, the
103
organizational structures of successful carriers, such as British Airways, were
examined by Lufthansa management during the drafting of the
reorganization plan. Decentralization through the adoption of a holdingcompany structure appears to be the first step in a process which could
transform existing patterns of corporate governance and co-determination at
Lufthansa. Pushing wage and benefit negotiations to the subsidiary level
threatens to undermine overall union cohesion and strength. The increase
in part-time work among Lufthansa employees also presents problems for the
traditional high-cost German model, as it circumvents existing social
legislation regarding wages and benefits. Another force for change sterns
from the construction of Lufthansa's global alliance. Not only are additional
options of "out-staffing" available, whereby crews from non-union carriers
would be used to staff Lufthansa international flights, but the diffusion of
Anglo-American models of "lean" management may also change IL-he
style
and structure of management-employee relations at Lufthansa, further
undermining the traditional features of the cooperational German model.
Finally, the necessity to raise investment capital through share issues, as
opposed to bank lending, points to a shift in the source of financing at
Lufthansa, indicating a potential weakening of traditional bank-industry
links. Parallel to this process, of course, is the retreat of state participation in
corporate decision-making at Lufthansa because of privatization. Each of
these changes enhances the autonomy and strength of management, as
institutions of trust and cooperation with ownership (bankEl and labor are
weakened in the name of increasing competitiveness in response to global
competition.
Despite the potential for fundamental change in the structures of
corporate governance at Lufthansa, the act remains that change was
negotiated at every stage with full union input. For example, workforce
reductions were accompanied by lucrative compensation packages, a practice
unheard of in the Anglo-American model. Regardless of the new concernstructure at Lufthansa, collective bargaining will still take place at the
corporate (not subsidiary) level under the terms of the 1994 supplementary
agreement. With respect to the retreat of the state and the banks, outside a
major change in legislation at the German and European levels, Lufthansa
will continue to be partially state-owned (although a minority stake). The
major banks continue to have substantial equity stakes in Lufthansa, while
104
international investors tend to be institutional ones, meaning that Lufthansa
can rely upon relatively stable and patient capital. Although international
forces are necessitating change, these forces continue to be filtered by the
principle institutions of the German model: co-determination at the firm
level; tripartite bargaining between state, firm and labor with respect to
fundamental industrial change; bank-firm cooperation. While macro-level
globalization necessitates cost-cutting and a more flexible corporate structure,
relationships between management and labor remain governed by
important and resilient micro-level institutions uniquo to the German
model. Despite the'appearance of increasing management autonomy, firms
must operate within the legal structures of codetermination, barring
'he
legislative change.
While attacking high operating costs and adopting organizational
changes designed to increase flexibility, Lufthansa has, thus farl avoided
major institutional change which would cause us to doubt the endurance of
the German model. Yet the question for the future is, will changes in the
substance of the management-labor bargain ultimately affect changes in the
procedure of bargaining? That is, could the "minimalist" change at Lufthansa
lead to larger, structural changes which could blur the features of the
traditional German model? Several indicators suggest this may be possible:
decentralized labor negotiations; wage and benefits gaps bet-ween younger and
older workers; potential out-staffling;and management learning-by-doing
through global strategic alliances. Each of these possibilities would affect the
structures governing management-labor cooperation, and thus could
undermine traditional institutions of trust-building which sustained the
German model throughout the post-War era. Further, macro-level
institutional change could also affect firm-level structures. The growing
securitization of corporate finance, for example, threatens to erode traditional
bank-industry links, as the cost of international capital becomes radically
cheaper in comparison to traditional domestic sources. These shifts parallel a
larger trend in society itself, reflected in the growing use of consumer credit in
Germany, wich may lead to decreasing savings rates. Thus, as Lufthansa
and Germany look to the future, the viability and appeal of the German
model appears to be at least threatened by international pressures. As the
Lufthansa case demonstrates, however, micro-level institutions are
surprisingly resilient and flexible in the face of change. Perhaps the Lufthansa
105
story offers an example of facing globalization within the German model,
potentially retaining the appealing features of management-labor
cooperation, while shedding the inefficient high-costs which threaten to
hinder growth.
IC Cnclusions
The privatization of Lufthansa illustrates the motives and mechanics
of privatization in Germany. Both domestic and international changes
undermined support for traditional opponents of privatization, while the
need to privatize Lufthansa was amplified by these same pressures.
Specifically, the massive increase in the federal debt level due to unification
costs created a "crisis-space" which gave the executive branch greater freedom
to implement a more aggressive privatization strategy. At the same time, the
globalization of the air transport industry placed great pressures on Lufthansa
to rationalize its organization structure and to reduce firm debt. This
implicated a capital increase which was beyond the means of both the federal
government and the main banks. Privatization, therefore, was a result of the
convergence of firm-level pressures and macro-level pressures on the federal
government.
Restructuringh
L
the wake of privatization illustrates the current stress
upon the traditional "German model" of corporate governance, particularly
with respect to management-labor relations at the firm level. The potential
evolution of this model implicates debates surrounding convergence or
divergence in the organization of firms and economies. The Lufthansa case
illustrates the intense international pressures on firms in competitive
industries to adopt aspects of "best practice." While Lufthansa shed some of
its traditional high costs and adopted a more decentralized corporate
structure, these changes have been negotiated within the institutional
framework of the German model, and have not, thus far, altered these
institutions themselves. Although the form of industrial relations has not
changed, the substance of the management-labor bargain has shifted decidedly
against labor interests at Lufthansa, and it remains to be seen whether these
changes in substance will ultimately lead to institutional changes which
reflect the weaker position of labor at Lufthansa.
106
Further research ith respect to Lufthansa can proceed on several
interesting and important levels. The continued process of structural change
needs to be monitored closely. Further research also should be directed at
tracing the effects of enhanced management autonomy on the functioning of
the new concern structure at Lufthansa, and on management-labor relations
generally. With respect to management styles, the extent to which Lufthansa
adopts the practices of its strategic partners will be an important indicator of a
further erosion of the German model. More analysis also needs to be done on
the effects of the new concern structure at Lufthansa in terms of the carrier's
competitiveness. On a more macro-level, further research on the impact of
the growing trend of "securitization" is needed to map changes in German
attitudes toward equity holdings, and a potential shift to Anglo-American
forms of corporate ownership and management control. Finally, the
changing regulatory environment facing Lufthansa needs to be analyzed in
order to document how these environmental changes affect corporate
governance. With respect to privatization, more work needs to be done on
Ldnder-level efforts at either privatizing or contracting out public goods and
services.
In a rapidly changing global industry, Lufthansa has, thus far,
successfully met the challenges of change. More important, its efforts have
been undertaken within the confines of "the German model" of industrial
relations. While labor is not materially better off than it was in the 1980s it
remains an important player in corporate decision-making, and the secure
position of Lufthansa in the world market translates into greater security for
Lufthansa employees. Yet change in international air transport is not a
temporary phenomenon, it is a fundamental part of the market itself. As
Lufthansa continues to compete, only time will tell if the current cooperation
between traditional economic and social partners will continue, or will be
displaced by a more adversarial system much like that in the United States
and Great Britain. Despite remarkable international change, the German
model remains surprisingly resilient.
Appendix A: List of Interviews Conducted in Germany February/March, 1995
Dr. Roland Czada
Professor, Max Planck Institut
K6ln
Dr. Josef Esser
Professor, Johann Wolfgang Goethe-Universita-t
Frankfurt
Dr. Rolf-Dieter Graf,
Investor Relations, Lufthansa AG
Frankfurt
Bernd Harth
Director, Federal Employees Section
DAG
Frankfurt
Dr. Roger Kiem
Attorney
Feddersen, Laule, Scherzberg &
Ohle Hansen Ewerwahn
Frankfurt
Dr. Susanne Uitz
Professor, Max Planck Institut
K61n
Manfred Maertzke
Director of Wage Negotiations, Civil Aviation
Member, Lufthansa Aufsichtsrat
OTV
Stuttgart
Ingo Marowsky
Senior Member of Representation of Flight Attendants
Lufthansa AG
Delegate for International Affairs, OTV/Civil Aviation
Frankfurt (Interviewed in Boston)
108
Dr. Richard H. Sterzinger
Attorney
Boesebeck, Barz & Partner
Frankf urt
Dr. Anqe-Kathrin Uhl
Labor-law Attorney
Sigle, Loose, Schmidt-Diemitz & Partner
Stuttgart (Degerloch)
Werner-Michael Waldeck
Attorney, Former Chairman
Frankfurt Stock Exchange
Boesebeck, Barz & Partner
Frankfurt
109
Appendix B: List of Lufthansa Subsidiaries
Group Companies
% interest owned
Air Transport Training International, Inc., Tucson, USA
100
Airline Training Center Arizona (ATCA), Inc., Goodyear, USA 100
Airport Services Friedrichshafen GmbH, Friedrichshafen, BRD 100
Albatros Versicherungsdienste
GmbH, K61n, BRD
BBL Gemeinnuutzige Berliner Qualifizierungsges f Berufe
im Luftverkehr mbH, Berlin, BRD
Capital Gain International 1986) Ltd., Hong Kong
CICONIA Grundstiicks-Vermietungsges. mbH
Co. oHG
Norderstedt,
BRD
100
100
100
-05*
Condor Berlin Gesellschaft fr Flugdienstleistungen mbH,
Berlin,
BRD
100
Condor Flugdienst GmbH (CFG), Frankfurt, BRD
Condor/Cargo Tchnik GmbH, Frankfurt, BRD
Consolidated Catering Services (China) Ltd., Hong Kong
100
100
100
Delvag Luftfahrtversicherungs-AG,
K61n, BRD
Delvag Riickversicherungs-AG,
K61n, BRD
100
90
Deutsche Akademie fr Flugmedizin gemeinniitzige GmbH,
Frankfurt,
BRD
Deutsche Lufthansa Berlin-Stiftung, Berlin, BRD
Deutsche Lufthansa Untersffitzungswerk GmbH (LUW)
K61n, BRD
90
100
100
DLT Extra Executive Travel Reiseflug GmbH, Frankfurt, BRD
100
DLT of USA, Inc., Dover, USA
100
EFM - Gesellschaft fr Enteisen und Fluszeugschleppen am
Flughafen Miinchen mbH, Freising, BRD
Euro Lloyd DFB Reisebdro GmbH, Frankfurt, BRD
Euro Lloyd GHH Reisebdro GmbH, Oberhausen-Sterkade, BRD
Euro Lloyd Reisebiiro GmbH, K61n, BRD
Euro Lloyd Reisebdro, Moscow, Russia
Euro Lloyd Travel, Inc., New York, USA
European Air Transport S.A./N.V., Brussels, Belgium
European Air Transport (Holdings) S.A., Brussels, Belgium
51
51
51
85
100
100
60
57.5
FGH Frankfurter Gesellschaftfir Hotelwerte mbH,
Frankfurt,
BRD
100
German Travel Services GmbH, Frankfurt, BRD
German Wings Luftfahrt-Service GmbH, K61n, BRD
Hellenic Cargo Centers S.A. (HCC), Athens, Greece
LSG Airport Gastronomiegesellschaft mbH, Frankfurt, BRD
LSG Catering C-dna Ltd., Hong Kong
100
100
51
100
100
LSG Catering Guam, Inc., Guam, USA
100
LSG Catering Hong Kong, Ltd., Hong Kong
LSG Catering Netherlands B.V., Amsterdam, Netherlands
LSG Catering Saipan, Inc., Saipan, Micronesia
LSG Catering Thailand, Ltd., Bangkok, Thailand
LSG Holding Asia, Ltd., Hong Kong
LSG Lufthansa Service Asia Ltd., Hong Kong
LSG Lufthansa Service Enterprises Ltd., Hong Kong
LSG Lufthansa Service GmbH, Frankfurt, BRD
LSG Lufthansa Service Guam, Inc., Guam, USA
LSG Lufthansa Service Hong Kong Ltd, Hong Kong
LSG Lufthansa Service Nordost GmbH, Berlin, BRD
LSG Lufthansa Service Saipan, Inc., Saipan, Micronesia
LSG Lufthansa Service USA Corp., Wilmington, USA
Lufthansa A.E.R.O. GmbH, Alzey, BRD
Lufthansa AirPlus Servicekarten GmbH, Neu-Isenburg, BRD
Lufthansa Airport- and Ground-Services GmbH,
Frankfurt,
BRD
100
Lufthansa Airport Services Brussels S.A., N.V.,
Brussels, Belgium
Lufthansa Airport Services Dresden GmbH, Dresden, BRD
Lufthansa Airport Services Italy S.r.l., Milan, Italy
Lufthansa Airport Services Leipzig GmbH, Leipzig, BRD
Lufthansa Berlin Gesellschaft fdr Deinstleistungen mbH,
Berlin, BRD
Lufthansa
Lufthansa
Lufthansa
Lufthansa
Lufthansa
Lufthansa
Lufthansa
Lufthansa
99
100
99
100
100
Cargo Airlines GmbH, Kelsterbach, BRD
Cargo GmbH, Frankfurt, BRD
CityLine GrnbH, Kriftel, BRD
Commercial Holding GmbH (LCH), K61n, BRD
Lufthansa Consulting
100
100
100
100
100'
100
100
100
100
60
100
100
100
100
100
100
100
100
100
GmbH, K61n, BRD
100
Design Center GmbH, Kbln, BRD
Hotel-Gesellschaft mbH, Kriftel, BRD
Inmoboliaria S.A. de CV., Mexico
International Finance (Netherlands) N.V.,
100
100
100
Amsterdam, Netherlands
100
Lufthansa International Finance NV. (i.L.),
Curaqao Lesser Antilles
Lufthansa Services (Thailand) Ltd., Bangkok, Thailand
100
49
Lufthansa Simluatorzentrum Berlin GmbH,
Berlin-Sch6nefeld,
BRD
100
Lufthansa Traditionsflug GmbH, Frankfurt, BRD
Orderich Company Ltd., Hong Kong
Penta Hotels MUnchen GmbH
CO. Hetelverwaltungs KG,
MUnchen, BRD
62
Penta Hotels MUnchen, MUnchen, BRD
ReisebUro A.L.R. Atlantik-Luft-Reederei
100
100
100
GrnbH, Bonn, BRD
Reservation Data Maintenance India Private Ltd.,
90
ill
New Delhi, India
51
Siidflug Gesellschaft fr Flugdienstleistungen mbH, K61n, BRD 100
Terra-Studienreisen GmbH, Augsburg, BRD
100
The AirPlus Company Jersey Ltd., Jersey (Channel Islands), UK 73.1
Majority of voting rights
Associated Companies
% interest owned
AFS-Aviation Fuel Services GmbH, Hamburg, BRD
Aircraft Maintenance and Engineering Corp. (AMECO),
Beijing, China
50
40
Airest Restaurant- und HotelbetriebsgesellschaftmbH,
Vienna, Austria
Airport Club fUr International Executives GmbH,
Frankfurt,
BRD
30
25
AMADEUS Austria Marketinggesellschaft mbH,
Salzburg, Austria
Amadeus Data Processing GmbH Co., Beteiligungs-KG,
Erding, BRD
25
50
Amadeus Global Travel Distribution S.A., Madrid, Spain
Askerwall & LSG Restaurant AB., Mdrsta, Sweden
BAVARIA-LLOYD Reisebdro GmbH, MiInchen, BRD
BEIJING Lufthansa German Center GmbH Co. KG,
K61n, BRD
25
40
49
27
Berliner Lufthansa Airport Services GmbH, Berlin, BRD
49
c + d Luftfracht-System
40
GmbH, K61n, BRD
Cargolux Airlines International S.A., Luxembourg
Caterair International - LSG Lufthansa Service, Milbrae, USA
CGN Jumbo-Flug Ges fr Flugzeugvercharterung mbH,
MiInchen,
BRD
24.5
50
50
China Air Catering Ltd., Hong Kong
CityLine Simulator und Training GmbH, Berlin, BRD
De Montis Catering Roma S.r.l., Rome, Italy
DHL International Ltd., Bermuda, USA
Egyptian Aviation Servies Company Ltd., Cairo, Egypt
EuroBerlin S.A., Paris, France
Eurocargo S.A., Flughafen Luxembourg, Luxembourg
50
50
40
25
40
49
50
FIRST Reisebdro GmbH
20.2
Co. KG, Diisseldorf, BRD
GFD Geselischaft ffir Flugzeildarstellung mbH, Hohn, BRD
50
Global Logistics System Europe Company for Cargo Information
Services GmbH, Frankfurt, BRD
46-85
Global Logistics System Worldwide Company for Development
of Freight Information Network, GmbH, Frankfurt, BRD 25
Giines Ekspres Havacilik A.S. (Sun Express), Antalya, Turkey
40
112
Hansa Luftbild GmbH, MUnster, BRD
Hongkong Beijing Air Catering Ltd., Hong Kong
Hongkong Shanghai Air Catering Ltd., Hong Kong
IBYKUS THG Grundbuchtreuhandgesellschaft mbH
25.33
45
45
Co., KG,
Heidelberg, BRD
25
ITAS Reiseveranstaltungs-GmbH, Vienna, Austria
Jamestown Investments Ltd., Hong Kog
Kempinski AG, Berlin, BRD
Lauda Air Luftfahrt AG., Vienna, Austria
LSG Lufthansa Service Espafia S.A.,
Santa Cruz de Tenerife, Spain
LSG Servair BV., Amsterdam, Netherlands
Lufthansa German Center GmbH, K61n, BRD
Lufthansa Informationstechnik und Software GmbH LIS,
Berlin, BRD
Co., Alfa-Golf KG, GrUnwald, BRD
Co., Alfa-Mike KG,
BRD
Lufthansa Leasing GmbH
95
95
Co., Alfa-Tango KG,
GrUnwald, BRD
Lufthansa Leasing GmbH
Gruunwald,
95
Co., Bravo-Mike KG,
BRD
Lufthansa Leasing GmbH
Griinwald,
95
Co., Bravo-Juliett KG,
BRD
Lufthansa Leasing GmbH
95
Co., Alfa.-November KG,
GrUnwald, BRD
Lufthansa Leasing GmbH
GrUnwald,
40
50
25
46
Lufthansa Leasing GmbH
Lufthansa Leasiing GmbH
GrUnwald,
26
37.5
20.18
26.47
49
Co., Bravo-November KG,
BRD
Lufthansa Leasing GmbH, GrUnwald, BRD
Lufthansa Rent a Phone GmbH, Frankfurt, BRD
LZ-Catering GmbH, Hamburg, BRD
Mercator Reisebilro GmbH, MUnchen, BRD
MIRA Insurance Broker and Consulting GmbH, K61n, BRD
49
49
30
24.9
49
25
MVP Versuchs- und Planungsges fr Magnetbahnsysteme mbH,
MUnchen, BRD
Onex Food Services, Inc., Delaware, USA
RegioKom. Berlin Ges. fdr Biindelfunkdienste mbH,
Berlin, BRD
Shannon Aerospace Ltd., Shannon, Ireland
Shenzen Nuclear Power Expartiate Multi-Services Co., Ltd.,
Shenzen, China
Siam Flight Services Ltd., Bangkok, Thailand
START Holding GmbH, Frankfurt, BRD
The AirPlus Col, Ltd., London, UK
THG Grundbuchtreuhandgesellsschaft rnbH, Berlin, BRD
Venture Capital Enterprise - VCE S.p.A., Rome, Italy
50
23.05
24.9
35
25
49
33.33
20.29
25
50
113
Xi'an Aircraft Catering Co., Ltd., Xi'an, Shaanxi Cna
ZFB Zentrum fir Flugsimulation Berlin GmbH, Berlin, BRD
Taken from, Lufthansa Offering Circular
40
50
114
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